Jonathan Clements's Blog, page 158

Playing Defense

TRUTH HAS A FUNNY way of punching you in the gut. I received my punch thanks to the 2022 decline in the stock market, which put a dent in the “funded” status of the 529 college-savings plans for my two sons, ages 16 and 14.

Buy and hold is all well and good if you have an infinite investment time horizon. Strict adherents will argue that mark-to-market gains and losses are just noise. Time will smooth out the ripples. But what if the funds are earmarked for an upcoming goal, like college costs or retirement?

Already, parents in my shoes are aghast at nearly $80,000 a year for tuition, room and board at private colleges in the Boston area. A 20% drop in a fully funded 529 plan with, say, a $320,000 balance means a $64,000 loss. My sons, of course, may go to one of the excellent public universities here in Massachusetts, where tuition is lower. But I want them to have a choice.

Responsible investors manage risk. Target-date funds, available in some 529 college-savings plans and most retirement plans, achieve this with a “glide path.” These funds automatically shift a portfolio’s asset allocation away from stocks as the target date approaches, reducing the prospects not only of stock-like losses, but also stock-like gains. As a prudent financial advisor would counsel, don’t risk what you can’t afford to lose.

Well, here’s another truism: There’s no return without taking risk. I still feel like I need investment growth. Instead of getting out of the stock market, I’m staying fully invested, while managing risk with my own homegrown downside protection.

The 529 plans for my sons remain invested in stocks. But at the same time, I’m spending some of the money that would otherwise have gone into their accounts to buy put options. Those put options pay off if the S&P 500 plunges in value. What if, instead, the S&P 500 rises? The options will expire worthless.

To be sure, the cost of hedging is a drag on performance. But I think of the option premiums I pay as similar to insurance premiums. Yes, I’m giving up some of the gains in a rising stock market. But in return, I have the peace of mind that the options will keep my boys’ college funds intact when the market declines. Sometimes the best offense is a good defense.

Philip Sun, a former portfolio manager, is co-founder and CEO of Adaptive Investment Solutions , LLC, a provider of one-click portfolio downside protection solutions. He also teaches finance and data analytics at Boston University and Hult International Business School . An amateur violinist, Philip is a devotee of Bach and gypsy jazz. In the early mornings, you can find Philip training for sprint triathlons in the western suburbs of Boston. Contact Philip via LinkedIn and follow him on Twitter @Adaptive_Invest .

The post Playing Defense appeared first on HumbleDollar.

Got Change?

I MESSED UP MY retirement planning—but I have few regrets.

I don’t know if or when I’ll fully retire. Arguably, I’ve been at least semi-retired for the past nine years. That’s how long I’ve gone without a fulltime job. On the other hand, during those nine years, I’ve continued to earn enough to cover my living costs and I’ve worked longer hours than at any time in my life, thanks mostly to that insatiable mistress known as HumbleDollar.

So, how did I mess up? I’ve reached age 60 with more money than I need for retirement. That might sound like bragging, but the frugality that got me here had a downside. I’ll never know for sure, but I may have enjoyed my working years more if I’d opened my wallet a tad wider, perhaps owning a more comfortable home, taking more lavish vacations and driving cars that were more reliable.

Today, I’m better about spending. I eat out once or twice a week, and I take more expensive vacations. But with all that, I still spend less than I could. As I ponder this, I think there are four lessons for retirement savers.

Prudence almost inevitably leads to over-saving. Imagine you’re in your early 20s. Ahead lies all kinds of potential financial misfortunes: unemployment, ill-health, bad financial markets, divorce, family members in financial need and much more. How can you prepare yourself? The obvious answer: Start saving like crazy and don’t let up.

To be sure, most Americans don’t do this. But for the sort of folks who read HumbleDollar—the ones who care perhaps too passionately about their future self—this sort of manic saving behavior quickly becomes second nature. By your 50s, you might realize you’re on track to have plenty saved for retirement. But by then, if you're like me, frugality will have become a way of life and you could find it awfully hard to change.

Don’t rely on the 80% rule. One rule of thumb says you can comfortably retire on 80% of your final salary. There’s some logic to this. Upon retirement, you no longer have to pay Social Security and Medicare payroll taxes, plus you no longer need to save perhaps 10% or 15% of income for retirement, so 80% of your old salary should suffice.

But what if you’ve been socking away 20% or 30% of your income, the kids are launched into the adult world and your mortgage is paid off? You might be comfortable living on half or less of your old salary. That’s certainly true for me.

Downsizing is a game changer. In 2020, I decamped from a relatively quiet town just north of New York City and moved to Philadelphia. I made the change for a host of reasons, including a desire to return to city living and to be closer to family. Cost of living wasn’t a consideration—but maybe it should have been.

Over the past two-and-a-half years, my monthly living expenses have fallen sharply, which means I’m now spending even less than I can afford. Philadelphia home prices are a bargain compared to the New York area. My property taxes are half what they were. I no longer own a car. Restaurant prices are noticeably lower.

To be sure, Philadelphia would hardly be considered a low-cost place to live. But it’s undoubtedly cheap compared to New York City and its more affluent suburbs. Indeed, I tell folks that Philadelphia is a smaller, mellower version of New York—where everything is one-third off.

My 2020 move has made me realize how much you can save by downsizing and relocating. I mention this reluctantly—because I feel folks often make a mistake when they trade their current circle of friends for a locale with a lower cost of living. But I must confess, based on my move to Philly, I can see the potential financial savings are huge.

Money buys happiness even if we don’t spend it. Yes, in my over-saving, I missed out on spending that might have brought me added happiness. But it’s hard to know how much additional happiness that spending would have delivered, if any.

Meanwhile, I know where I stand today—and I find the money I’ve accumulated brings me ample happiness. It’s not because I’m spending somewhat more these days, though I am, and it’s not because I regularly sit back and admire my account balances. Rather, the money I’ve amassed brings me happiness because it allows me the luxury of rarely thinking about my own money. I have no worries about how much I spend because I’m confident I have enough.

Could I potentially spend more in the years ahead? I’ve been working on a retirement wish list, something I’ll write about in the weeks ahead. But I’m not sure it’ll involve spending a whole lot more. There’s a tradeoff between spending today and leaving the money to grow, so there’s more tomorrow. We need to strike a balance between the two, something I haven’t been very good at.

Now that I’ve reached my 60s, is it time to change my ways? Perhaps. It's something I regularly think about. But for now, I’m not sure additional spending would bring me much additional pleasure—but knowing my portfolio continues to grow leaves me with a warm, fuzzy feeling of financial contentment.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

The post Got Change? appeared first on HumbleDollar.

Getting Good Counsel

IN OLD ENGLISH, to be “ready” for something meant to be well counseled. The English King Aethelred the Unready earned his nickname because he was ill-advised. His tumultuous reign ended with invasions and revolts, including one by his son.

When we feel we have “extra” money or even just a hankering to spend, there’s a host of outside voices to counsel us. Most try to influence our actions out of self-interest—for their commercial benefit. Like a king, we always have to ask what’s behind our trusted advisors’ counsel.

We also have two hidden advisors inside of us, which is the subject of this article.

The rational regulator. In the guise of rules of thumb, or heuristics, this internal voice can give us a general direction. Guidelines like “if it costs more, it’s better quality” nudge our spending choices. Such guidelines may be helpful, but they’re also generalizations.

The gut-grabber. We all have instantaneous shortcuts that override our thinking process. Does the word “snack” immediately conjure in your mind carrot sticks or potato chips? How does such an instant thought get the inside lane, and thus the advantage, in decision-making?

Gut preferences form subtly and unconsciously over the course of a lifetime. It could be formed by an ad or jingle we liked, or a favorite uncle who shared a special snack when we were young. We then internalized their cumulative effects into unconscious habits—let’s call them “sways.”

Both of these internal advisors, heuristics and sways, serve the same purpose: They save us time and mental energy by providing a shortcut to decision-making. Thanks to their help, we can get the goods quickly and enjoy them faster.

These are not external nudges delivered by salespeople at decision time, so we trust them more. Still, following our own counsel can be like closing our eyes when driving down a seemingly familiar road. We still need to watch out for hazards.

Take the idea of going on vacation. You might immediately lean toward a cruise. Your rational regulator tells you that the meals, lodging and entertainment are bundled in one easy-peasy package. From fond memories of past cruises, your gut-grabber has visions of being on the high seas, staring at the sunset.

A definite yes? Maybe. Are there extra costs, like side excursions, factored into this low-resolution vision of a cruise? Even more important, are there deals on other vacation options that you might have overlooked because you’re so fixed on cruising?

Certainly, our personal preferences should be considered first. They endure because they’re constantly validated by experiences that we find satisfying. And yet they may not be right every time.

For example, I often get more value from more expensive goods. On the other hand, I can't tell the difference between a $10 and $100 bottle of wine, so that heuristic doesn’t work for me when picking vino. Similarly, we’ve found hole-in-the-wall restaurants with better food than Michelin-starred ones. And we’ve paid for investment counseling that was inferior to my brilliant wife’s free analysis.

Meanwhile, my gut loves—and always calls for—a good fried snack. My doctor and the aforementioned wife, however, are now starting to outvote my gut two-to-one. I have favorite hiking trails for adventure, but I now need to seek out new paths—and healthier snacks—for the adventure to continue.

We should not let the presumed favorite automatically be the unchallenged champ. Still, it’s hard to be mindful and intentional about every choice, especially when we must question what our internal advisors have successfully recommended so many times before.

Like Aethelred, your realm and your reign are only as good as your choices. As the ruler, you can periodically call an audience of all your advisors. Reexamine what they recommend as your preferences, spending rules and default choices. Make these advisors justify their continued employment. And ask whether changing circumstances demand that they should be altered, evolved or even abolished from your privy council.

Jim is a former business litigation attorney who taught economics and humanities for 20 years. He's the author of a three-book series on how to teach students about behavioral economics and media literacy. Jim lives in Texas with his wife and fellow HumbleDollar contributor, Jiab. They have a two-book series coming out in 2023, Behavioral Economics: A Guide for Youth in Making Choices and The Social Media Diet: A Guide for Young People to Be Smarter Online Users and Consumers. Check out Jim's earlier articles.

The post Getting Good Counsel appeared first on HumbleDollar.

January Junkie

REMEMBER THAT PLANE ride when the woman next to you was consumed with the Times crossword puzzle? Every so often, she would grimace in frustration and rapidly tap the pencil against her forehead. But after a few deliberate sips of red wine, she returned to her obsession.

I have my own fetish. It’s called the January effect.

As December winds down, the tendency of stocks to rise in January becomes a favorite topic of market pundits. It has bedeviled the best and brightest ever since investment banker Sidney Wachtel stumbled on the phenomenon some 80 years ago. In subsequent years, many academic studies have pinpointed small-capitalization stocks as the primary beneficiary of this seasonal anomaly.

So, what’s going on? Testifying to its elusiveness, many hypotheses have been advanced to explain the outperformance of small companies in January. By far the most popular of these is tax-loss selling. Investors take their losses in late December, driving down share prices, and then presumably buy the stocks back early in the new year.

Another theory implicates window-dressing. Large institutions dump their losers at year-end, so they won’t appear in their annual reports, and then repurchase the shares after Dec. 31. Others have pointed to a “bonus bump,” whereby corporate heavy hitters commit their year-end bonuses to buying stocks in January. Other commentators have proposed a sentimentality factor—that investors, in good cheer in the aftermath of the holidays, throw money into the stock market.

If January has historically been one of the best months of the calendar year, why has it been particularly good for small-company stocks? According to the venerable efficient market hypothesis, small stocks’ sensitivity to this seasonal anomaly is rooted in their greater volatility and risk. Thanks to the wide bid-ask spreads and low trading volume of small-cap stocks, the December lows tend to be that much lower and the January recovery that much sharper, especially when you have institutional investors throwing their dollars around.

As commentators have noted, the January effect has weakened in recent years. Perhaps the burgeoning growth of retirement assets has reduced the need for tax-loss selling. Alternatively, maybe the fear-of-missing-out crowd is buying early, shifting the aberration into late December.

Burton Malkiel, one of the esteemed fathers of the efficient market hypothesis and author of the iconic A Random Walk Down Wall Street, thought that calendar anomalies were doomed to extinction as more investors become familiar with them. Malkiel has also suggested that whatever calendar effects still exist aren’t big enough to justify the transactions costs involved in trying to exploit them.

Why am I boring you with all these details? Come December, I once again surrendered to my weakness for the small-cap anomaly and reached for Jeffrey Hirsch’s Stock Trader’s Almanac. The implication of the Almanac’s graph is clear: In recent years, the thrust of the small-cap bounce started around Dec. 15 and lasted through Jan. 15.

On cue, I bought $30,000 of the Vanguard Small-Cap ETF (symbol: VB) in mid-December. As you might gather, my recovery from addiction is not complete. Still, I indulge only in moderation, with more than 95% of my portfolio invested in broad market index funds.

You may be surprised at the outcome of my little experiment. Small stocks did indeed impressively outpace their larger fare. But my execution, alas, was fatal. You see, this go-round, all the outperformance occurred in January. In fact, the last two weeks of December actually showed a small loss.

So what, you say, you must have caught the January part of that move? But I didn’t. Frustrated and humiliated by the absence of any superiority among small companies in the final two weeks of 2022, I could stomach no more pain. I broke with my plan and liquidated my position on the last trading day of the year. So much, I mused, for any last vestige of the January effect.

I tell myself I’m not a momentum investor, but isn’t that what the recency bias of selling after the disappointing December was all about? Once again, I have to confront my old nemesis, emotionally driven trading that derails careful planning.

In the end, we had a rip-roaring small-cap rally, all in January, none in December. Here are the numbers. From Dec. 15 through year-end, Vanguard Small-Cap ETF lost 3.2%, versus a loss of 3.8% for Vanguard Large-Cap ETF (VV). Because of an outsized jump in small stocks in early January, the respective figures from mid-month to mid-month swung decisively in favor of small-capitalization stocks, with a gain of 3.2% for Vanguard Small-Cap compared with no change for Vanguard Large-Cap.

The small-cap effect over the entire month of January came in at an eye-popping 10.1%, versus 6.5% for large-caps, according to data from Yahoo Finance. Vanguard Small-Cap even outran the blistering 9.7% monthly return for Vanguard’s Information Technology ETF (VGT), heralding the best January showing for Vanguard Small-Cap ETF since its inception in 2004. Pronouncements of the demise of the January effect may have been premature. It is, it seems, still very much alive.

Knowing when to trade is doubly difficult. You have to be right on the way out as well as on the way in, and I failed that test.

More composed investors will heed this admonition from The Motley Fool: “You may end up with a winning set of stocks in the short run, but you may also disturb your asset allocation and spend a lot of time and energy doing so. A buy-and-hold strategy aimed at long-term investment goals is likely to be your best bet, so be careful when it comes to short-term calendar-based predictions.”

But I’ll give the last word to Forbes: “Small cap stocks can outperform their larger counterparts in January. But that doesn’t mean they always do.”

Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve's earlier articles.

The post January Junkie appeared first on HumbleDollar.

When Free Isn’t Free

DO A QUICK REVIEW of Twitter and other social media sites, and you’ll find extensive use of the word “free.” The dictionary defines free as “without cost or payment.”

College, health care, child care, preschool, even housing are often mentioned in connection with “free.” The actual cost of “free” may not be what it seems. Free in this context typically means shifting the cost from one person to another, or redirecting money to some favored purpose. The true cost of free may be an expense passed on to the next generation in the form of accumulated debt.

Free education in my community, for example, costs 58% of our $13,000 annual property tax bill. How often have you heard someone complain about property taxes? But at the same time, our public schools are popular and celebrated. Citizens complaining about their property taxes seldom draw the connection between their taxes and what the schools cost.

Even if they do, they’re not usually aware of the total cost. In many states, including mine, teachers’ pensions have never been adequately financed. The true cost is usually hidden from taxpayers as an unfunded obligation.

I imagine that everyone knows that nothing is truly free, so why are we so susceptible to the lure of free things? Well, it’s an easy concept to understand—and it sure sounds appealing.

But how accepting would we be if, instead of “free,” the cost of something was described as “hidden in your taxes"? Or what if something “free” came with the proviso that “the cost is to be paid by your children”?

Politicians use free to add appeal to a proposal. Yet often they do so without consideration of short-term costs and consequences or long-term government debt. Who will pay that burden in the future?

Social Security and Medicare are two excellent examples of short-term thinking. To avoid talking about costs, funding and taxes, politicians have allowed both programs to deteriorate slowly toward insolvency.

All the while, calls for free health care and enhanced Social Security benefits proliferate. These days, many citizens seem willing to abandon the broad-based funding of such social programs in favor of tapping only the “wealthy” to keep them going. As a society, are we any different from those families who live beyond their means and don’t save?

The post When Free Isn’t Free appeared first on HumbleDollar.

Continuing Care

I EXPECTED TO SPEND early 2017 blogging about my fourth round-the-world trip, which I’d just completed, and planning my next journey. Instead, I spent much of the year on the couch with a heating pad, in between assorted medical appointments, everything from acupuncture to meeting with an infectious disease specialist.

Eventually, I got a definitive diagnosis—I had a form of rheumatoid arthritis—and, in early 2018, an effective medication. But I had been forcibly reminded of something I’d first learned 10 years earlier, when I broke my ankle. My house, as things currently stood, was not suitable for aging in place.

But was aging in place a good idea? During 2017, I learned just how debilitating persistent pain could be. I was 70, single (by choice), childless (by choice) and with no close relatives nearer than England. I already had a chronic, potentially disabling disease. What if I suffered a stroke or heart attack, or fell and broke a hip, or developed dementia? At a moment when I was least able to handle the decision, I’d have to find and fund in-home care, or move to an assisted living or skilled nursing facility.

In addition, I was thoroughly tired of the responsibility and cost of maintaining my house, not to mention preparing all my meals. Those of you thinking that your spouse could handle such things should bear in mind that, at some point, one of you will be a surviving spouse. Even if you have children close by, do you really want to burden them with your care?

I had friends living happily in continuing care retirement communities, and there were a number of CCRCs nearby. A CCRC typically offers a continuum of care from independent living to assisted living to skilled nursing. It was time to do my research. Ruth Alvarez's guide to CCRCs proved invaluable. HumbleDollar readers can also get a good introduction to the four types of CCRC by reading Howard Rohleder’s 2022 article.

For me, the choice of type was straightforward. I wanted a place that promised not to throw me out if I ran out of money and preferably backed that promise with a benevolent fund. I wanted a nonprofit, because a good for-profit might too easily be taken over by a bad one. I wanted on-site assisted living and skilled nursing, which is pretty standard among CCRCs. I wanted a place that accepted Medicare and Medicaid, and had a good rating. I wanted a place that had been open for a while and had sound financials. And I wanted an on-site clinic, exercise facilities and plenty of activities. I started collecting brochures.

If a CCRC is regulated, it’s regulated by the state government. North Carolina requires CCRCs to give prospective residents a detailed financial and policy disclosure statement, and also post these documents online. That's how I learned that one potential CCRC didn't own its land and buildings, and another appeared to be operating at a loss. The brochures were fairly basic, although they usually included floor plans. Clearly, a visit was the acid test.

My first choice turned out to be an unexpected disappointment. It didn't feel friendly and seemed rather isolated. Another promising prospect, offering plenty of continuing education opportunities in conjunction with one of the local universities, had ceilings so low that the apartments felt claustrophobic. It also seemed to be spending a lot of money on décor, and charged comparatively more for independent living so that it could charge less for assisted living. I preferred to gamble that I’d spend longer in independent living.

I ended up putting down a refundable deposit at a nonprofit CCRC with good-looking financials that had been operating for 30 years—long enough that some residents were second generation. It was walking distance to a library, cafes and restaurants, and was also on a bus line. Everyone I met there was friendly, plus it had the welcoming vibe I’d missed at my first choice. In early 2019, the wait for a one-bedroom apartment was four-plus years, but the next year I was able to switch to a two bedroom in a new building that should be completed this summer.

All the apartments in the new building are at least two bedrooms. Many, if not most, of the prospective residents are couples. The CCRC solution is attractive enough that some couples are moving to a one bedroom, while they wait for a two bedroom to become available. The wait list at my choice is now seven-plus years for a one bedroom, 10-plus for a two bedroom in the original building and 12-plus for a cottage. The CCRC’s wait list population is 65% couples and 35% single individuals. If you need a place with no wait list, probably your only hope—at least in my area—is a CCRC that’s just starting or possibly one that’s undertaking a major expansion. You also need to pass both a physical and financial check when moving in, another reason to plan ahead.

Before my expected move to the CCRC, I moved to an apartment and sold my house. I’ve been pleasantly surprised to find that I don’t miss the house, despite living there for more than 30 years. The move to a two-bedroom apartment meant I could keep my study, which certainly made the change easier. Another bonus: After paying the CCRC entry fee, I’ll qualify for a substantial medical deduction on this year's taxes—which I’ll use to reduce the tax on a Roth conversion.

Kathy Wilhelm, who comments on HumblerDollar as mytimetotravel, is a former software engineer. She took early retirement so she could travel extensively. Born and educated in England, Kathy has lived in North Carolina since 1975.

The post Continuing Care appeared first on HumbleDollar.

Through the Roof

IT WOULD BE EASY to sell my home “in a snap” for a no-obligation, all-cash offer—or so I was told in a mailing I received last week. I frequently get letters, texts, emails and phone calls from companies that want to buy my two-bedroom condo for cash.

It’s tempting to sell. I’m retired, and both my children have left to find their fortunes in bigger cities. But I suspect the new owner would then rent out my unit for some jacked-up price. That’s happening across the country, as 60 Minutes and other news media have documented. The buyers, of course, are just being capitalists and taking advantage of a housing shortage in many cities. But where does that leave lower-income families, including retirees?

A wood frame two-bedroom, one-bath bungalow in an older neighborhood in my college town is renting for $1,500 a month. The landlord wants proof of income that’s three times the rent. That’s $54,000 a year, which is the median household income in our area. But what if you’re a single parent with a service job? Or a single retiree like me? That $54,000 is considerably more than my fixed income.

My son rents a two-bedroom, two-bath apartment in a relatively new building in Atlanta. His landlord wants to increase his $1,900 monthly rent by $400, a 21% hike. Management refused to negotiate with him, so he’s moving to a one-bedroom unit elsewhere and will still come out ahead, even after moving costs.

My daughter’s landlord in Orlando raised her rent 4.8% to $1,625 for her suburban ranch house. The landlord insisted on only a 12-month lease, even though my daughter and her husband would like to stay longer while they save to buy a home. The house is owned by an individual and managed by a company.

As long as my millennial children stay in big metro areas, I fear they’ll never become homeowners, despite their relatively high incomes. I live in a university town, and I see no reason for the skyrocketing rents here for homes that aren’t considered student housing. Those two-, three- and four-bedroom apartments next to campus are renting for $1,000 per room.

Some experts blame builders for their emphasis on large, single-family houses because that’s where builders make the most profit. Renting an apartment, duplex or smaller house used to be a segue to buying your first home. Now, it’s a permanent status—because renters can't afford to save for a house down payment.

I don’t want my condo to become part of this “filtering,” where housing moves into a higher price tier and an anonymous company demands outrageous rents from people scraping by. In the past, houses and neighborhoods filtered down in price as they aged, according to this article. That’s no longer as true today.

The author cites stats from Los Angeles that show most of its affordable housing was lost to higher rents and not because the buildings were demolished, replaced or renovated. Elected local leaders’ usual answer is to build more affordable units, but those rents are rising faster than incomes.

I love that my condo has increased in value. It’s really my only asset. But if I choose to sell and move, I’ll want a buyer who lives here and not a company that will gouge others and fuel the increasingly unaffordable housing market. As a condo board member, I also believe owners who occupy their units take better care of them and show interest in the entire condo community.

Of course, I might just have to stay for financial reasons. Why? I’d likely pay more in rent than I do now for my fixed-rate mortgage plus condo fee.

Ron Wayne spent 26 years working for newspapers in Pennsylvania and Georgia before becoming the editor in the University of Florida’s main news office. During his 10 years working there, he earned his master’s degree in mass communication and taught as an adjunct in the College of Journalism and Communications. Since retiring in 2020, Ron’s resumed writing regularly, both for HumbleDollar and on Medium.com, where he's launched a publication for single retirees who need to be extra thrifty. Check out Ron's earlier articles.

The post Through the Roof appeared first on HumbleDollar.

Better Than Cake

ON DEC. 23, 2022, while Santa and his elves were busy loading his red sleigh with gifts, the 117th Congress was putting together some goodies of its own, formally known as the Consolidated Appropriations Act, 2023. Before we rang in the new year, President Biden signed the bill into law.

Included in that 1,600-page, $1.7 trillion appropriations measure was a special present for folks like me—the so-called Legacy IRA. This allows me to increase the sum I give to charity and the money I earn on my fixed-income investments, while lowering the income tax I pay. Kind of like having my cake and eating it, too.

You might also benefit from this new provision. If you’re age 70½ or older, you can make a once-in-a-lifetime tax-free rollover of up to $50,000 from your traditional IRA to fund a charitable gift annuity (CGA). That $50,000 rollover doesn’t count as taxable income—but it will count toward your required minimum distribution, a must-do for those age 73 and older. You’ll receive fixed monthly, quarterly or annual payments for life based on your age. In most cases, the payout is set by the American Council on Gift Annuities. Income can be payable for life to just you or just your spouse, or to both of you.

Over many years and careers, I funded several tax-deferred retirement accounts—a traditional IRA, plus various employer plans. I lived frugally and kept adding money to these accounts until I retired at age 72. That’s when I merged them all, except a Roth IRA and an inherited IRA, into my traditional IRA. Today, most of my living expenses are covered by Social Security, a small pension and other investments. I withdraw only the required minimum distribution each year from my IRA, which—for 2023—will be almost $63,000. Ordinary income tax is due on that money, which kicks me into a higher tax bracket.

But thanks to my new Legacy IRA, I won’t owe tax on much of my 2023 required minimum distribution. That’s because I can roll over the lifetime maximum of $50,000 from my IRA to a CGA and thus I’ll only owe tax on the remaining $13,000 of my $63,000 required distribution. The CGA will pay me a stable, guaranteed income for the rest of my life. The amount is age-based. At age 76, my fixed rate is an attractive 6.8%. If I were to choose my almost 75-year-old husband as the income recipient, his rate would be 6.6%. If I wanted the payments to continue until the second of us died, our joint rate would fall to 5.9%.

CGAs are available from large, well-known nonprofits, including community foundations, universities, religious groups, human rights advocates, cultural organizations, and charities focused on medical research, animal rights and environmental concerns. Some causes you believe in are probably on this list.

When you fund a gift annuity, your contribution will be invested in a pooled reserve account along with money backing other donors’ gift annuities. The payment amount you receive each year is set and depends on how old you are at the time of your donation. After your death, money left in your CGA will be given to the charity or charities of your choice, either as an endowed gift that will last forever or as an outright cash gift.

Intrigued? Here are the steps I took to set up my Legacy IRA:

I identified charitable organizations to receive monetary gifts from my CGA after my death. I named two religious congregations and an international organization that benefits widowed persons.
I chose a nonprofit to administer my gift annuity and signed its one-page CGA agreement. I decided on my local Community Foundation Tampa Bay. There was no expense involved in doing this.



I made a tax-free $50,000 qualified charitable distribution, or QCD, from my Vanguard Group traditional IRA directly to the Community Foundation Tampa Bay. That’ll save me $12,000 in federal income tax this year. (I’m in the 24% marginal tax rate, so $50,000 x 24% = $12,000.) Since this distribution isn’t counted as taxable income, it helps lower my Medicare surcharge known as the IRMAA, short for income-related monthly adjustment amount. The exclusion also allows me to avoid the 3.8% surtax on my net investment income.
I’ll receive an immediate annual income of $3,400 based on my age. This will be paid quarterly. That’s a stable, guaranteed lifetime fixed income of 6.8% every year, regardless of market fluctuations. That income rate is better than that on certificates of deposit or government bonds—though, of course, annuity buyers don’t get their principal back. Set-up costs are non-existent or minimal at most. It's a win-win situation where you can help your favorite nonprofit and boost your retirement income at the same time.
The remaining CGA balance at my death will create the “Kathleen Moore Rehl Legacy Fund Endowment” that will send an annual check to all three of my charities of choice forever. This is a terrific way for me to give a gift every year to nonprofits I care about after I’m gone.

What’s the catch? It’s a one-time-only option. You can only use this Legacy IRA option in one calendar year, the funds must come from your IRA and you can’t contribute more than $50,000. Other retirement accounts, like 401(k)s and 403(b)s, don't qualify. Income payments can only go to you or your spouse, and payments can’t be deferred. The CGA payments you receive are taxed as ordinary income. Like other fixed-income payments, inflation will eat away at the purchasing power of the payments you receive.

What about the other almost $13,000 I’m required to withdraw from my IRA this year to fulfill my total $63,000 required minimum distribution? I plan to donate much of that money directly to several nonprofits from my IRA. Result: Most of the money I take out of my IRA this year will count as qualified charitable distributions—and won’t be taxed.

Kathleen M. Rehl is retired following a career in financial planning and an “encore career” of speaking and doing research about widows. She authored the award-winning book, Moving Forward on Your Own: A Financial Guidebook for Widows. Kathleen enjoys writing legacy poetry and stories, as well as assisting various nonprofits. You can learn more at www.KathleenRehl.com. Check out Kathleen's earlier articles.

The post Better Than Cake appeared first on HumbleDollar.

An Unkind Cut

FOR FOLKS WHO HAVE retired, but aren’t yet age 65 and hence eligible for Medicare, health insurance can be a major concern. These folks typically aren’t covered by their old employer and are now searching for individual health insurance. The good news: There’s a tax credit available—one that I believe doesn’t get enough attention.

The advanced premium tax credit, or APTC, is a credit you can take in advance of filing your taxes. It’s used to reduce your monthly medical insurance premiums. Say your monthly medical premiums are $600, but your APTC comes out to $400 a month. Your net premium would be just $200. Sounds great, right? But how does it work?

When you apply for coverage through the federal or a state-run health care exchange, you’ll be asked to estimate your annual income. If you qualify for an APTC, you can use it to reduce your monthly premium. If, at the end of the year, your income ends up being more than you estimated, you may owe taxes. If your income ends up being lower than estimated, you could get money back.

Do you qualify? As with much of financial planning, the answer is, “It depends.” For starters, every state is different. In fact, I’ve even seen counties in the same state with different rules. Still, the key factor is your income. Notice that, unlike Medicaid, the APTC doesn’t consider your assets. Your net worth could be $1 million or even $10 million dollars, and you could still qualify for the APTC. I’m not saying that makes sense. I’m just saying that’s the rule.

I won’t get into the nitty-gritty of the calculation for qualifying. But here’s what it says on the IRS website: “In general, individuals and families may be eligible for the premium tax credit if their household income for the year is at least 100 percent but no more than 400 percent of the federal poverty line for their family size.”

In fact, thanks to 2022 legislation, eligibility for the next three calendar years is even broader—and folks with six-figure incomes may find they qualify. To see if you do, check out this calculator.

That brings us to an interesting strategy discussion for pre-65 retirees who get health insurance through one of the health care marketplaces. How do you keep your taxable income below the threshold to qualify for the tax credit? Some folks will have IRAs, Roths and taxable account savings, and can strategically withdraw funds in a way that keeps their taxable income lower. But others, who may only have traditional retirement accounts where every dollar pulled out is subject to income taxes, must be much more parsimonious about their expenses and account withdrawals if they’re to qualify for the credit.

That’s triggered some interesting discussions with some of my financial-planning clients. I encourage them to make sure they’re focusing on the right things. Sometimes, clients will talk about cutting back their expenses, so they don't need to generate so much income and thus they can qualify for the APTC. But I suggest these clients stop and ask themselves: What’s the overriding goal here?

For example, are they aiming to be the richest person in the cemetery—or are they trying to have a happy retirement? Does cutting back expenses during the most youthful years of retirement make sense?

I don’t mean to disparage the tax credit. It’s fantastic—so fantastic, in fact, that I’m writing this article about it. But I often find myself reminding clients to ask that crucial question: What’s the overriding goal? I think it’s a useful question to ponder when dealing with many life decisions—and, indeed, it’s one I ask myself regularly.

Luke Smith is a CFP® professional and practicing financial planner. He creates customized financial plans for each family he works with around the country. Luke pursued financial planning to combine two passions: finance and people. He spends his free time with his wife Heather and their family in Maryland. Outside of work, Luke enjoys the outdoors, golf, reading and writing. You can reach him at  Luke.Smith@Wealthspire.com. Check out Luke's earlier articles.

The post An Unkind Cut appeared first on HumbleDollar.

On My Shoulders

IN SOME FAMILIES, adult siblings work together to take care of their aging parents. But many times, one adult child ends up doing most, if not all, of the work—which is how things have played out in my family.

I’m the oldest sibling, and my wife and I took on the task of caring for my octogenarian mother and stepfather after they moved to Georgia from Colorado in 2017. I have a brother and stepbrother who live in other states.

Since our parents grew up during the Great Depression and Second World War, they were always very frugal. They also didn’t seem confident that either my brother or stepbrother would be much help as they aged. Instead, they leaned on my wife and me, in large part because we work in health care and could oversee their health needs, as well as the fact that we live debt-free.

Even though my stepfather never mentioned it, I know that the lack of a meaningful relationship with his son bothered him. Before he passed away in 2021, my stepfather told me that he’d been giving money to his son, now in his 50s, and was trying to teach him how to invest. I had my doubts about the success of this venture, but I kept my thoughts to myself.

I’ve known my stepbrother for more than 45 years, but we have never had any type of relationship. Both of his parents were physicians and, in my opinion, he was a spoiled only child. As an adult, the only time he’d visit his father was when his travel was paid for by his father. He often failed to call or send a card on Father’s Day, Christmas and birthdays.

My stepfather was hospitalized after a fall in summer 2020, so I called my stepbrother to let him know. Prior to this, I hadn’t talked to my stepbrother in many years. His first response was to get angry with me because I hadn’t called sooner. While biting my tongue, I explained to him that his father didn’t want me to call right after his fall and surgery. In addition, I explained that my wife and I were doing our best to help my mildly demented 87-year-old mother, as well as his 88-year-old father, while navigating a pandemic.

During fall 2020, my stepbrother and I talked on the phone a few times and he did make an effort to visit his father in the assisted living facility near us. I quickly noticed, however, that every time I talked to him on the phone or in person he would ask about his father’s investments or how much their house was selling for. I always told him that, in my role as his stepfather’s agent under his power of attorney, I was a fiduciary and that he should talk to his father if he wanted more information. Of course, he made no offer to help me prepare their home prior to putting it up for sale.

After my stepfather’s death in 2021, neither my brother nor stepbrother have made any effort to find out how my mother is doing. There haven’t been any calls, texts or emails from either one. My brother has made no effort to visit his mother. Yet both expect to receive an inheritance once my mother passes away. As executor, I will carry out the wishes of our parents as detailed in their wills.

If you find yourself named as executor or granted power of attorney, it’s important to make sure your actions are above suspicion. Soon after my stepfather died, I notified his pension provider, as well as the Social Security Administration, of his passing. Both were very efficient at recalculating the monthly benefits for my mother.

While going through this process, I realized how easy it would be for caregivers to delay informing pension providers or Social Security of address changes or the death of elderly family members. But I also learned of one obstacle to fraudulent behavior: The funeral home told me that it notifies Social Security after a person’s death.

According to the 2021 Consumer Sentinel Network Data Book, government documents or benefits fraud is the leading type of identity theft. This type of identity theft is higher than that for either credit card fraud or loan or lease fraud.

Frequently, it’s a family member who takes financial advantage of the elderly. Indeed, older adults tend to suffer larger financial losses when the perpetrator is someone they know. Comparitech has reported that losses from financial abuse of the elderly in all 50 states exceed $113.7 billion a year. It’s widely accepted that this annual loss is less than the actual amount due to the underreporting of elder fraud.

These numbers are mind-boggling to me.

When I was named in my parents’ powers of attorney, I felt honored. But I also came to realize the magnitude of the responsibility. To try and reduce fraud, I placed a credit freeze on both parents. I also hired an attorney who specializes in elder law to assist me. My goal has been to make sure that they were comfortably taken care of in their final years, while managing their significant assets competently and without any question of shenanigans.

Scott Martin is a semi-retired family medicine physician associate (previously known as a physician assistant) and has been practicing medicine for the past 18 years. His previous career was in academia doing research and teaching at the University of Georgia. He and his wife enjoy traveling and spending time with family. Scott's previous article was Too Trusting.

The post On My Shoulders appeared first on HumbleDollar.