Getting started with a 403b (presentation)

This material is educational only. It is NOT investment advice.

(This   material   is   educational   only.   It   is   NOT   investment   advice.)

GETTING STARTED WITH A 403b                       2014

A 403b account is the public sector employee’s version of a 401k account. Like the 401k accounts, money is deducted from your pay and then contributed into an investment fund that you control.

The advantage of these accounts has to do with taxes. You can contribute money from your paycheck without paying any taxes on it until later. Your investment in a 403b also gains (or loses) money with no taxes due. Of course, you’ll pay taxes eventually, but not for many years when you are retired and start to receive your investment dollars to add to your retirement income (or if you pull money out before retirement which generally carries a penalty plus tax implications). Whether the 403b tax deferral is beneficial to you as an individual will depend on if you end up in a lower tax bracket once you’ve retired or start drawing out the money.

To get started with a 403b account you sign up with your employer. When you sign up you must designate which company is managing your 403b account because that is where your contributions will be sent. Most people contribute monthly with equal deductions taken from each paycheck. Employers have agreements that allow you to choose from several options with a few different companies such as insurance companies.

You must also designate what kind of investment account you choose for your 403b dollars. Companies offer many options and you decide which option (or combination of options) seems most beneficial to you. Professional advice is generally to diversify the type of investments chosen and to be careful about the fees imposed.

Your 403b account is a contract with a private company, not with your school district. This company manages your investment, but there are no guarantees of investment returns unless you choose a guaranteed investment option. These options will generate lower expected returns, but will limit your risk. Many people do not want to worry about losing their money and will invest part or even all of their 403b dollars in a guaranteed account.

Many people choose various types of stock market accounts in order to earn more of a return. These accounts are not guaranteed and you can both gain and lose money in them. Stock market accounts can “fluctuate wildly” on a weekly or even daily basis. Last year the stock market (as measured by the S & P 500 Index of five hundred large American companies) was up 32%. This market performance during 2013 is an example of why people want to be in the market when it is going up.

All investors dream of being in the market only when it is going up, and somehow avoiding the time periods when the market is down. Professional advice tells us that this is a fool’s dream. Even seasoned professionals whose full-time job consists of watching and predicting business cycles cannot predict what will happen tomorrow.

Instead, sound advice is usually pretty boring: invest for the long-term and keep your money invested during downturns as well as growth periods.

There are many different options to think about, and the number of options is a barrier for people who just want to know, “What is the right thing to do with my money?” Because we all have a lot of emotions around money a 403b account can cause some stress (especially when investments are down), so it is a good idea to know yourself and how you feel about financial risk. When you get started with 403b decisions many companies will ask you to work through a questionnaire about how you feel about risks related to money. It is a good idea to take these seriously, because you don’t want to lie awake nights worrying about how Coca-Cola will be doing in Russia next year.

  1. Do you own a Three-Legged Stool?

In terms of planning for a happy retirement the concept of a three-legged stool stands for a solid base from which to operate. Each leg of the stool is a different type of income that will help you make ends meet during a long retirement period. In “traditional” retirement thinking those three legs consisted of:

*earned Social Security benefits

*pension plan from your employer

*personal savings and investments

For public educators who do not receive Social Security retirement benefits one leg is missing, and if you don’t have personal savings then two legs are missing.

Other types of retirement income might include:

*part-time work

*rental real estate

*stocks & dividends

*inheritance from relatives

*a trust account established in the past.

There are a lot of different circumstances for each individual, but for many workers having one more leg to stand on seems like a pretty good idea, and a 403b account can provide one of those missing legs.

A reminder about Social Security:

An educator counting on receiving earned Social Security benefits must be careful, because there are legal provisions that will severely limit the amount of Social Security benefits that can be received by anyone who is also receiving another government pension including military pensions and teachers’ pensions. There are fifteen non-Social-Security states in the US, and Illinois is one of them. In these states educators are affected by both the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). These affect not only the benefits you have earned yourself, but also survivor benefits from a deceased spouse. Most teachers who have taught 25 years or more in Illinois will not receive any of their expected Social Security benefits, including survivor benefits from a spouse who predeceases.

2. What does 403b stand for?

The name 403b stands for the paragraph in federal tax law that allowed for the creation of this type of account in 1980. In essence, a 403b account is a contract with a life insurance company or some other investment entity. Your contributions are sent by your employer (through automatic payroll deduction) to a plan initiated when you start your account. The company you select as your 403b provider will apply each contribution as soon as it is received, and allot your contribution into one or more types of investment strategies that you select.

Examples of different types of investments available in a typical 403b plan include:

*Cash account that pays guaranteed interest (considered very safe),

*Bond accounts meaning your money will be loaned to a taxing body (considered very safe)

*Investment in different parts of the stock market (considered less safe)

*International investments in foreign company stocks (considered less safe)

There will be many variations on the concepts mentioned above, and one of the difficulties that people experience is simply wading through the options available and making selections. Imagine a child sent to the grocery store to buy a loaf of bread and expecting to find a small shelf stocked with loaves of bread. All she has to do is pick one up and pay for it. But imagine a modern supermarket with artisan loaves in the deli area, all the various brand names on the ordinary shelves filling an entire aisle, and more choices in the frozen section. What is our shopper faced with? Perhaps too many choices. Is she going to return home without any bread at all because she simply couldn’t make up her mind? Let’s hope she thinks through her options and comes up with something both tasty and nutritious.

The array of investment choices can present a similar obstacle through the abundance of different plans to choose from, so you have to prepare ahead of time by thinking about how your investment strategy will proceed.

  1. “Stayin alive, . . . stayin’ alive”

One of the reasons that retirement planning takes on increasing importance is that many people are living longer.

When Social Security was first created it applied to those 65 and older. One reason that age 65 was chosen was the life expectancy of the current generation of workers back in 1935: male life expectancy was 59.5 years. In other words, people born in the 1870s who were still alive after turning 65 in the 1930s were unusual survivors who had lived well past most of their contemporaries.. It was very unusual for anyone to see age 80.

Nowadays, of course, life expectancies are increased, so the typical person should expect and plan for living into their 80s, and probably beyond. When a certain age is quoted as one’s life expectancy, here is what it means: half of people will still be alive. Also, life expectancy advances as one ages. Most people who live to age 70 will make it to age 80 as well, and many people who make it to age 80 will still be alive at 90.

Although living a long life is a nice problem to have it means that everyone who plans for their retirement years must think about the possibility of having a long period of years to plan for. Here is an excerpt from Personal Finance for Seniors, for Dummies by Eric Tyson and Bob Carlson:

“A few decades ago the average retirement didn’t last long. A person retired at 65 and, on average, died around 70. Since then, life expectancy has increased while the average age of retirement has decreased. What many people don’t realize is that each year you stay alive your life expectancy increases. At your birth your life expectancy may have been, say, 73. But once you made it to young adulthood, your life expectancy increased to the late 70s. So, getting your life expectancy right is important because your savings must last at least the rest of your life. If you don’t understand life expectancy you can have serious problems when you plan portfolio withdrawals for a 20-year retirement and then experience a 30-year retirement.

“For men age 65 today life expectancy is about 85. That means about half will live to 85 or beyond. A number of them will live past 90. Should all of today’s 65-year-olds base their retirement plans on a life expectancy of 85, half of them will have underestimated their life spans and be at risk of running out of money.

            “Financial planners generally recommend that married couples plan on at least one spouse living to age 90 or 95. Those aged 80 and older are the fastest-growing demographic group. As an example, consider a married couple in which both people are age 62 today. There’s a 95 percent chance at least one of them will live to age 75, and a 65 percent chance at least one will live to age 85, according to the Center for Retirement Research at Boston University. There’s a 40 percent chance at least one spouse will live to 90, and a 15 percent chance one will live to 95 or older.

            “Remember: A retirement of 20 years will be routine for those retiring in their early to mid 60s today. A significant number will be retired for 30 years and longer. Some may even spend more time in retirement than they did working.”

  1. Dollar Cost Averaging: simpler that it sounds

Dollar Cost Averaging might sound like a math problem, but really it’s part of the solution to a problem. If someone starts a 403b (or other investment account) and contributes the same dollar amount each month, continuing time after time, then they are taking advantage of a simple yet powerful investment strategy known as Dollar Cost Averaging. Here is an example of how it works:

A sales professional works three different territories on a rotating basis and has to stop for gas in each one: in Territory A gas costs $3.00 per gallon, in Territory B gas costs $4.00 per gallon, and in Territory C gas costs $5.00 per gallon. Because of her expense account rules each time she stops she puts in $30.00 worth of gas.

What is her average cost per gallon?

Does it seem that her average should be $4.00? Let’s see:

In Territory A her $30.00 buys 10 gallons.

In Territory B her $30.00 buys 7.5 gallons.

In Territory C her $30.00 buys only 6 gallons.

Therefore she has spent $90.00 and bought a total of 23.5 gallons, and her average cost works out to $3.83 per gallon. The reason is that she bought more gallons at the lowest price than at the highest price and this brings down the average.

What does Dollar Cost Averaging have to do with investing? The monthly investment in your 403b account works just the same way as the different prices at the gas stations. Each month when your monthly contribution is processed it will buy a certain amount of shares in your investment choices. Some months (when the “market is up”) the prices are higher, and your money buys fewer shares. However other months (when the “market is down”) your contribution will buy more shares for the same amount of money.

What this means is that throughout the life of your 403b you will experience the highs and lows of Dollar Cost Averaging. To take advantage of this automatic process you simply have to keep contributing even when the “market is down.” Now, this might sound easy to do when sitting in a comfortable chair and thinking about theoretical dollars that belong to someone else, but for many people when they open their envelope (or log on to their on-line account) and see that their investment is down for the month, maybe even down for the year, it is tempting to stop contributing until they see that the market is starting to go up again.

Downturns in the market are the best time to buy in, because you are buying your shares at “sale prices.” Why pay full price when you can get your shares on sale?

Of course, the risky and worrisome part of investing is: there is no guarantee that the market will ever go back up! In the history of stock market investments there have been many downturns, usually two or three each decade. Each time the market eventually recovered and started making gains again. Does this mean that there is no chance of losing money? No, because Past Performance Is No Guarantee of Future Results.

Keep in mind, however, that in a world full of risk the risk of losing money in an investment must be balanced against another risk: the risk of doing nothing.

You will have to decide for yourself (probably with help from those you trust) how much money you want to invest in your 403b. If your investment is down staying the course might be hard to do, especially when compared to how you feel when it is going up each month. But be prepared for both sets of emotions, and try to see the advantages of Dollar Cost Averaging for those who are invested for the long term. Looking historically the stock market that has gone down has always gone up. Eventually.

  1. The Benefits of Starting Early

Let’s say you want to get started with a 403b account. Is there a “best time” to get your account up and running? A Chinese proverb states that the best time to plant a tree was twenty years ago. But the second best time is today. Yes, the best time to start your account was probably twenty years ago. However, the second best time is ASAP. The more time that your 403b has to grow the more difference it makes in terms of investment growth. Your account will grow for two different reasons: first, additional contributions that you make from payroll deduction, and second, investment growth when your shares are worth more than they were a month or a year ago. For an example, let’s say the investment is going up at an average rate of 6% per year (this does NOT mean that it goes up 6% EVERY year, as some years are better and some years are worse, just that averaged over time the growth works out to a 6% average).

In this example the contributions are a steady $500.00 per month, and they continue for a full twenty years. The first column is the total at the start of that new year (probably not January but the anniversary of this person’s start date, so it might be September or any other month.)

The second column shows their contribution for twelve months.

The third column calculates 6% of their new balance (the first balance PLUS the new $6,000.00 contributed that year). The amount in the third column is then added on to make the first column for the start of the next year.

In reality, growth would be calculated monthly so this chart is a simplified and condensed version. It shows that during the first years of experience you can expect that your own contribution (the $6,000 column) will make up the majority of the growth for that year. It takes until Year 12 for the last column to surpass the middle column. By Year 20 the last column ($13,243) is more than double of the middle column. Your 403b has started to do more of the work than you are!


Year        Balance           Contribution                 6% Investment Growth

Year 1          0                       $6,000                                  $360

Year 2       $6,360                 $6,000                                   $741

Year 3     $13,101                 $6,000                                $1,146

Year 4     $20,247                 $6,000                                $1,574

Year 5     $27,822                 $6,000                                $2,029

Year 6     $35,851                 $6,000                                $2,511

Year 7     $44,363                 $6,000                                $3,021

Year 8     $53,384                 $6,000                                $3,563

Year 9     $62,947                 $6,000                                $4,136

Year10    $73,084                 $6,000                                $4,745

Year11    $83,829                 $6,000                                $5,389

Year12    $95,219                 $6,000                                $6,073

Year13  $107,292                 $6,000                                 $6,797

Year14  $120,090                 $6,000                                 $7,565

Year15  $133,655                 $6,000                                 $8,379
Year16  $148,035                 $6,000                                 $9,242

Year17  $163,277                 $6,000                                $10,156

Year18  $179,433                 $6,000                                $11,126

Year19  $196,560                 $6,000                                $12,153

Year20  $214,713                  $6,000                               $13,243

TOTAL    $233,956

In the example above the contribution is $500.00 per month and continues without interruption for 20 years for a total contribution of $120,000. No fees are shown, but generally a small fee is deducted each year on the anniversary of the plan start date.

The chart is an illustrative example not a realistic scenario. In real experience an account would never grow steadily by the same 6% factor for twenty years in a row.

  1. A Long Way To Go and a Short Time to Get There!

Some people get a little depressed when they contemplate the realities of retirement planning. In the words of Jerry Reed, “We’ve got a long way to go, and a short time to get there!”

However, keep in mind that the growth years for your investments do not come to a screeching halt on the day that you walk off the job. A lot of retirement scare tactics start with the phrase, “By age 65, . . . “ It’s almost as if the 65th birthday is some kind of brick wall that everyone is heading toward.

Really, not much happens on your 65th birthday unless you’re planning a party. It’s not even full retirement age for Social Security anymore. Let’s take another look at the retirement compounding chart presented above, the one that ended at the word TOTAL after twenty years had gone by. Is that really the grand total? Not at all. Here is “The Rest of the Story:” the chart below shows the same 6% compounding continuing for another twenty years, but without any additional $6,000 employee contributions. In other words, you’re not working anymore, but you’re letting the 403b account continue to work for you:


Year            New Balance                                    6% Investment Growth

Year 21            $233,956                                                $14,037

Year 22            247,993                                                14,879

Year 23            262,873                                                15,772

Year 24            278,645                                                16,718

Year 25            295,364                                                17,722

Year 26            313,086                                                18,785

Year 27            331,871                                                19,912

Year 28            351,783                                                21,107

Year 29            372,890                                                22,373

Year 30            395,264                                                23,716

Year 31            418,880                                                25,139

Year 32            444,118                                                26,647

Year 33            470,765                                                28,246

Year 34            499,010                                                29,940

Year 35            528,951                                                31,737

Year 36            560,689                                                33,641

Year 37            594,330                                                35,660

Year 38            629,990                                                37,799

Year 39            667,789                                                40,067

YEAR 40          707,856

In the example above the employee makes no additional contributions, but the account balance continues growing due to investment results, assumed to be 6% annually. Reminder: this is a totally unrealistic assumption, as year-to-year results will vary with some years showing losses due to stock market downturns. Whether an average of 6% is realistic remains to be seen. Historically the market has done better than that in all but the most pessimistic 20-year periods.

Is the above chart realistic? Can someone really expect to accumulate 2/3 of a million dollars even though she hasn’t made a contribution in twenty years? It is certainly possible, IF the person begins contributing early in their work life. For example, at age 25 someone could begin contributing, continue for twenty years (until age 45), and then allow the 403b to grow unaided for another twenty years until age 65. Oops, there’s that age, again.

7. Keep on Keepin’ On

What if she lets it ride until age 71? Now, age 71 really is a barrier of sorts, because current rules demand that everyone begin pulling money out of any existing retirement accounts. This is so you begin paying income taxes on the distributions. There is a requirement known as the Minimum Required Distribution (MRD) and it kicks in at age 70 ½. (Technically, you don’t have to pull money out of every existing retirement account; someone who has multiple accounts can decide where their MRD will come out of.)

But let’s take a look at what could happen if someone let’s his account ride all the way out. An individual who begins contributing at age 21 and let’s their account grow until age 71 has another ten years to go, for a total of fifty years of growth. Again, this person hasn’t contributed a penny of his own money since Year 20:


Year              New Balance                        6% Investment Growth

Year 40               707,856                                    42,471

Year 41               750,327                                    45,019

Year 42               795,347                                    47,721

Year 43               843,068                                    50,584

Year 44               893,652                                    53,619

Year 45               947,271                                    56,836

Year 46            1,004,107                                    60,246

Year 47            1,064,354                                    63,861

Year 48            1,128,215                                    67,693

Year 49            1,195,907                                    71,754

Year 50             1,267,661

In the example above the employee makes no additional contributions, but the account balance continues growing due to investment results, assumed to be 6% annually. Please be reminded that Your Results May Vary, and Past Performance Is NO Indication of Future Results!

So, if you’ve always wanted to know if it’s possible to become a “403b-millionniare,” the answer is Yes, but not very likely. And we should all keep in mind that fifty years out it may well be that inflation makes $1 million just enough to buy yourself a nice new car.

  1. Is a 403b the same as a 401k?

The simple answer is, No. But they are similar.

Both plans are named for the corresponding paragraph of the US Tax Code that allowed for tax deferrals on investment accounts. The 401k paragraphs specify rules for people in private sector jobs.

People employed in public sector jobs such as public school teachers or police officers set up their accounts under the provision of a separate paragraph. It provides for tax deferral in the same way, but does not specify the same fiduciary responsibility for the employer who sets up the plan for their employees. In the private sector the law specifies that employers must contract with investment companies that are setting up their provisions in the best interest of the employees. This is called a fiduciary responsibility, and it carries the weight of law. (For example, someone who prepares your taxes has a similar responsibility to prepare your taxes in a way that is best for you, not best for them or best for the government).

Public entities (such as school districts or municipal governments) weren’t saddled with the same strictures. They have a lighter responsibility to their public employees, namely to present the information in good faith. Basically, if it turns out later that an investment company that they chose as a provider turns out to have lied, cheated, or stolen your contribution dollars, well, it wasn’t their fault.

In practice this means that companies that create the investment options available to you can get plans approved by public employers more easily than they can by private employers. The difference is usually small variations in the amount of fees charged to the account holders. Of course, investing is risky business for the companies involved, and if they can pass more of the risk along to the account holder (that’s you), then they will take advantage of the rules to do so.

For most public employees this difference doesn’t mean too much, because they cannot choose a 401k over a 403b anyway.

Nevertheless, the differences are there, and the small difference in fees charged can add up to quite a wallop. This is because the subtle changes affect the rate of compounding. In the example above the chart grew with an annual return of 6%, and it was calculated with 6% each and every year. In reality your account would have to perform better than 6% because of fees imposed. If the fee were 1% then it would take a 7% return for your account to net out 6% for the year.

In practice the fees charged on 401k accounts tend to be lower than the fees charged on a similar-type 403b account with the variations being in the range of 0.5% more in the 403b version. In a good year (for example 2013 showed an increase of 32% for stock market returns) that 0.5% isn’t a very big hit, lowering someone’s growth from 32% to a mere 31.5%. However, in a more meager year, say with 4% growth, your return has dropped to 3.5%. It makes enough of a difference that public employees should be lobbying to have all of the same advantages that a 401k account offers.

In fairness, analysis shows that even many 401k accounts are offered with fees that are excessive. It is one of the reasons that investment companies drool at the prospect of traditional company-sponsored defined-benefit pension plans changing to employee-controlled defined-contribution plans. They earn millions in additional fees imposed on separate accounts for every worker enrolled.



Year      Balance         Contribution                 6% Investment Growth

Year 1           0                $1,200                                       $72

Year 2   $1,272               $1,200                                     $148

Year 3   $2,620               $1,200                                     $229

Year 4    $4,049              $1,200                                     $315

Year 5    $5,564              $1,200                                     $406

Year 6    $7,170              $1,200                                     $502

Year 7    $8,872              $1,200                                     $604

Year 8  $10,676              $1,200                                     $712

Year 9  $12,589              $1,200                                     $827

Year10 $14,616              $1,200                                     $949

Year11 $16,765              $1,200                                   $1,078

Year12 $19,043              $1,200                                   $1,214

Year13 $21,458               $1,200                                  $1,359

Year14 $24,017               $1,200                                  $1,513

Year15  $26,730              $1,200                                  $1,676
Year16  $29,606              $1,200                                  $1,848

Year17  $32,655              $1,200                                   $2,031

Year18  $35,886               $1,200                                   $2,225

Year19  $39,311               $1,200                                  $2,430

Year20  $42,942               $1,200                                   $2,648

TOTAL   $46,790

The chart above can be used to more easily estimate how much money a given contribution could accumulate. For example, simply double the figures for a Monthly Contribution of $200, and triple the figures for a Monthly Contribution of $300.

From Wikipedia: “The section of the Internal Revenue Code that made 401(k) plans possible was enacted into law in 1978. It was intended to allow taxpayers a break on taxes on deferred income. In 1980, a benefits consultant named Ted Benna took note of the previously obscure provision and figured out that it could be used to create a simple, tax-advantaged way to save for retirement. The client he was working for at the time chose not to create a 401(k) plan.

“The Standard & Poor’s 500 Index (SPX) recorded an annualized rate of return of 3 percent between July 1999 and June 2013, according to data compiled by Bloomberg.” Taken from: http://www.bloomberg.com/news/2014-03-05/americans-shut-out-of-home-market-threaten-recovery-mortgages.html?cmpid=yhoo




GPO explained: here



Facing retirement as a couple

Here is a decent article from Forbes (by Janet Novack). It details several important questions for couples to work through when they begin to think about their retirement decisions together. The questions include:

* When will we retire? Are we in control of that choice?

* What will our life expectancy be?

* What will our expected lifestyle be like?

* How will we plan for one spouse to out-survive the other?

* Will we still have children, or parents, depending on us for support?

The questions are followed by some good analysis and comments along with some links that provide more information to help think through answers.

How do women look at financials?

Here is a nice general article (from Kelley Holland at CNBC) that attempts to address gender differences in the way men and women process financial planning advice.

Title: “What do women want? Financial advisors who get it”

The main points: women look at financials as important, but do not process the info in the same ways as most men are likely to do. Financial planners are missing the boat if they do not see these differences.


Also a related article called: “Why is there a gender gap in retirement savings?” This article makes the point that in general women’s goals for retirement are very different than most men’s. It is also from CNBC; written by Sharon Epperson.


Widgets & Flidgets?

Let’s say there is a venture capitalist running for Governor, and that someone really wants to vote for him. Because he made $53 million in personal income in one year.

So he must really know a lot about how to run a state with a population over 12 million. Even though he’s never held elective office.

Sounds good, right? But before voting there is this one voter who kind of wants to know: what is a venture capitalist? And how do they make $53 million in just one year?

Here is a made-up example of how a venture capitalist can acquire a company and make a profit:


In a small industrial city sits the factory for WIDGETS, INC. It occupies several acres and has been a leading employer in the area for almost 100 years now. This company doesn’t just make Widgets, however. Sure they started with Widgets, but they’ve expanded. They now make Widgets, Flidgets, and Smidgets.

In fact their Widget division, their core business for more than 80 years, has now been surpassed by the Flidget division. The Smidget division, a smaller up-and-coming newer part of the business, looks promising but hasn’t turned much profit yet.

In fact, lately neither has the large and traditional Widget division. It hasn’t turned a profit since the late 90s, although most years it hasn’t actually lost money.

The company has remained profitable mostly due to the Flidget Division which has fewer than 20% of the workers, but generates most of the profit. Here is how the three divisions break down (figures are in millions of dollars):

WIDGETS  Income: $45M   Costs: $46M   Employees: 275   Profit: ($1M LOSS)

FLIDGETS  Income: $9M     Costs: $4M     Employees: 41       Profit: $5M

SMIDGETS Income: $6M     Costs: $5M     Employees: 44       Profit: $1M

TOTAL:      Income:  $60M   Costs: $55M   Employees: 360     Profit: $5M

As we can see, on an income of $60 million this company returns a profit of $5 million, but this is before our venture capitalist gets hold of it. First, of course, he researches the company and its industry. He next presents the desirable features of this operation to his investors along with his pitch: “Let’s buy this company, and see if we can make it more profitable.”

Investors agree and they raise $20 million (some borrowed) enough to buy a controlling interest in WIDGETS, INC. Over the next two years they close the manufacture of Widgets, sell that plant and its land, divest the company of the 275 extraneous employees, and instead concentrate on increasing sales of Flidgets.


WIDGETS     Income: $0     Costs: $0          Employees: 0       Profit: $0

FLIDGETS     Income: $9M  Costs: $4.5M    Employees: 40     Profit: $4.5M

SMIDGETS    Income: $6M  Costs: $6M       Employees: 44     Profit: $0

TOTALS:       Income: $15M Costs: $10.5M  Employees: 84     Profit: $4.5M

As we can now see, our company is almost as profitable as it was before the takeover. However, it is much leaner and meaner. IT IS READY TO EXPAND IN NEW DIRECTIONS, AND STOCK PRICES ARE WAY UP. The redesigned company will become even leaner and meaner again over the next year when the Smidget division is sold off to leave behind, only:


FLIDGETS:  Income: $9.5M  Costs: $4M  Employees: 38  Profit: $5.5M

At this point, with stock soaring, our venture capitalist and his investors sell off their interests netting gains of $19M in their stock sales. Our venture capitalist earns $4M as his bonus for engineering this miracle.

The 38 employees left to run this company have had their health insurance cut, their pensions halved, and their annual paychecks trimmed a bit. However, they are all just happy to still have jobs as the other 322 former employees at WIDGETS, INC have not all been able to locate work. In fact, almost one quarter of them now depend on food stamps to help feed their families, and another quarter are starting over with minimum wage employment where they can find it.

Meanwhile our venture capitalist  is looking for more companies with possibilities for “growth.”