Jonathan Clements's Blog, page 175
November 30, 2022
November’s Hits
Planning to move to a retirement community when you quit the workforce? Ron Wayne takes a look at one of the most famous—The Villages in Central Florida.
As we age, our capacity to make sound financial decisions often wanes. What to do? Rick Connor offers a fistful of suggestions.
Folks rushed to buy Series I savings bonds in October, before the initial 9.62% annualized yield disappeared. But they would have been better off waiting.
Michael Perry and his wife just sold their Houston home. Where are they moving? They aren't. Thus begins the next phase of their retirement.
Michael Perry is in a quandary. He's sitting on a heaping pile of cash that's earning little interest and losing ground to inflation—but he's not sure it's prudent to hold less.
"Lifestyle creep doesn’t need to be a negative concept," writes Luke Smith. "Many of us want to work hard and earn more so we enjoy a better standard of living. That doesn’t sound negative to me."
Jim and Jiab Wasserman are itching to divide their time between their Texas home and Portugal. Jiab says there's just one thing holding them back: their cats.
"One of my jobs at Vanguard was to make a down market seem palatable to investors," recounts Greg Spears. "When stocks fell, a senior executive would invariably call to suggest we do a 'market story'."
How do you make sure your family can navigate your life, should you become incapacitated or after your death? For Richard Hayman, the answer lies in the "big book."
Want to avoid self-inflicted tax wounds? Adam Grossman discusses how to sidestep six common pitfalls.
Meanwhile, the most popular newsletters were my pieces on Happy Talk, New Rules for Success and Read Before Jumping, along with Rick Connor's Some Now More Later.
The post November’s Hits appeared first on HumbleDollar.
November 29, 2022
Through the Ages
WHEN I WAS IN MY 20s, I was lucky to work for a company that offered a pension plan—and that put me on the road to retirement. Today, unfortunately, company pensions are rare. How can you ensure a comfortable retirement? Try shooting for these age-related milestones:
Age 25. Start saving at least 15% of your gross income. As I mentioned in an earlier article, a Fidelity Investments study found that if you save 15% of your gross income every year from age 25 through 67, and you also receive Social Security, that should ensure you have enough to maintain your current standard of living once you retire.
Age 30. By this point, aim to have amassed retirement savings equal to at least one times your gross income, or so suggests guidelines from Fidelity. Invest that money in low-cost, broad-based index funds. These funds take away one of the biggest investment risks—underperforming the market averages.
Age 40. This might be a good time to purchase umbrella insurance, which can provide additional liability coverage, on top of what’s offered by your auto and homeowner’s policies. Umbrella insurance also covers incidents your homeowner’s insurance doesn’t, such as slander and defamation lawsuits.
Think of your umbrella policy as asset protection for your growing wealth. By this point, aim to have retirement savings equal to at least three times your salary.
Age 50. If you’re lagging behind your retirement savings goal, you can start making catchup contributions to retirement accounts. Under the catchup rules, those age 50 and older can contribute an additional $6,500 each year to a 401(k) and $1,000 to an IRA. How do you know if you’re on track for retirement? By age 50, you’d want to have at least six times your gross income set aside for retirement.
Age 59½. If you need to tap your retirement accounts, this is the age at which you can start taking penalty-free withdrawals from your IRA or an old 401(k).
Age 60. According to AARP, the best time to buy a long-term-care (LTC) policy, assuming you’re healthy and eligible for coverage, is between ages 60 and 65. At this juncture, the monthly premiums should still be affordable. If you have ample retirement savings, you might drop your disability and term-life insurance coverage, and then redirect those premium dollars to an LTC policy.
An estimated 70% of Americans who reach age 65 will need long-term care at some point during their remaining years, though the need for care is often relatively brief. Some seniors receive help from family members and friends. Still, roughly 50% will need some paid caregiving services. According to Genworth’s 2021 Cost of Care Survey, a private room in a nursing home costs an average $297 a day, or $9,034 per month.
Fidelity suggests that, as of age 60, retirement savers should have at least eight times their gross income socked away. Falling short? You might plan on downsizing or, alternatively, staying in the workforce for longer or working part-time in retirement.
Age 65. You can apply for Medicare, starting three months before your 65th birthday. You might enroll in federally run Medicare or opt for Medicare Advantage, the private insurance alternative.
If you’re enrolling in traditional Medicare and will need to change doctors, don’t wait until you receive your Medicare card before scheduling an appointment. Because of the shortage of primary care physicians, you should make an appointment while your Medicare application is being approved. You can schedule your doctor’s appointment for after your Medicare start date, and then provide them with your Medicare number prior to your appointment. Otherwise, you might have to wait months to see your new doctor. This is especially important if you’re on medication or need a medical procedure.
You should also keep in mind that you can't get a Medigap policy or enroll in a prescription drug plan until you have your Medicare number. After my Medicare application was approved, it took me two additional weeks to get approval for these two plans.
Age 67. For Social Security purposes, this is the full retirement age for those born in 1960 and later. By now, if you have at least 10 times your gross income saved, your nest egg—coupled with Social Security—should allow you to maintain your current lifestyle if you opt to retire.
Age 70. If you haven’t yet, now’s the time to apply for Social Security. Only 7% of men and 8% of women wait until age 70. But if you can afford to wait, you’ll receive an inflation-adjusted amount equal to some 77% more than the benefit you would have got at age 62, the earliest possible age to claim Social Security.
That larger check reduces the risk that you’ll reach the end of your life with a depleted portfolio and not enough income to cover your expenses. It’ll also give you more confidence to spend freely, something many retirees are afraid to do in their golden years.
Overall, Social Security is the best income annuity on offer. Unlike annuities sold by insurance companies, Social Security offers inflation protection, it’s taxed less heavily and there’s less credit risk.
What if you’re looking for additional income? An immediate fixed annuity might be right for you. Some financial advisors recommend waiting until your 70s to purchase one, so you get a larger payout. The payout is based on your life expectancy at the time of purchase. The older you are, the more income you’ll get.
By waiting, it also gives you a chance to see how your health holds up through your early retirement years. If your health is failing, you might decide it’s not for you. You could also find you’re spending less than you planned in retirement and thus you don’t need the extra income.
Age 72. Start taking required minimum distributions (RMDs) from your retirement accounts no later than April 1 of the year after you reach age 72. If you fail to take your RMD on time, you could be penalized 50% of the required amount not withdrawn. One exception: RMDs aren’t required from Roth IRAs.
Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor's degree in history and an MBA. A self-described "humble investor," he likes reading historical novels and about personal finance. Check out his earlier articles and follow him on Twitter @DMFrie.The post Through the Ages appeared first on HumbleDollar.
Rates Up Lumps Down
WE HAVE ALL BEEN affected by rising interest rates in 2022, from skyrocketing mortgage rates to plunging bond prices. A less-publicized casualty: Higher interest rates are having a big effect on those approaching retirement who are eligible for a pension.
How so? Many pension plans offer a choice between a lifetime stream of monthly income and a onetime lump sum payment. Rising rates could reduce the lump sum payment that many employees would receive next year by 25% or 30%.
My former employer’s pension plan offers a good example. It’s a final average pay plan that provides a lifetime monthly annuity payment at retirement, typically defined as age 65. The monthly income amount is based on three factors: an employee’s years of service, an accrual factor usually expressed as a percentage of annual pay and the employee’s average salary over his or her final three years of employment.
In 2014, my company added a lump sum option to the pension plan. An employee could elect to get a large, onetime payment instead of a monthly annuity. We were told the plan would follow the IRS section 417e method and use the minimum interest rates.
It turns out the calculation uses the time value of money. Specifically, the lump sum can be thought of as the amount you’d need to invest today, at a specified interest rate, to generate a stream of payments equal to or greater than the monthly annuity. The calculation uses an employee’s age to model his or her expected longevity.
The critical factor, however, is the chosen interest rate. The higher the interest rate, the smaller the lump sum. This makes intuitive sense. If you can earn a higher rate of return on your money, you need less of an investment to generate a stream of payments equal to the monthly annuity you could otherwise have chosen.
Because retirement can last for many years, the IRS breaks the interest rates used into three time segments—the first five years of retirement, years five through 20, and any time after that. IRS Section 417e provides interest rates for each segment.
The IRS’s interest rates have risen sharply this year. The interest rates prescribed by the IRS for October 2022 are 5.1%, 5.83%, and 5.68% for the first, second and third segments, respectively. By comparison, the equivalent rates in October 2021 were 0.87%, 2.74%, and 3.16%.
The IRS also allows pension plans to define a stability period when interest rates don’t change. Many plans use the calendar year as their stability period. That means that plans, which are currently using last year’s low rates, will likely switch to using higher interest rates starting Jan. 1, 2023.
The upshot is the lump sum retirees will be offered will soon be significantly less than what they might get today. Many employees are just learning of this change to their pension options, and have precious little time to make a critical decision.
In September, Ford Motor sent an email to some pension-eligible employees that explained that their lump sum option in 2023 would decrease by some 20% to 25%. To receive the higher lump sum, they would have to retire by Dec. 1, 2022.
I first heard about this issue a few weeks ago when a former colleague contacted me in a mild panic. She’d left our former employer a few years ago. She’s almost 58 and eligible to start a reduced pension.
Employees could take their pension as early as age 55, but the monthly payment would be reduced by about 8% per year, so it’s actuarially equivalent to the benefit at the plan’s full retirement age of 65. She was most likely going to wait until 60 to take her pension, but now the change in interest rates would reduce her lump sum payment by about 30%. She’s in a quandary about what to do.
I spoke with another colleague still employed by the company that will pay his pension. He’s 60 and was planning to work for a few more years, so he could continue to enjoy the salary and health benefits. His lump sum will be reduced by about 30% next year.
To collect his higher lump sum payment this year, he’d have to put in for retirement now, and then find another job or possibly return as a consultant. We discussed his options. He said he’ll likely continue working and let the decision ride.
The change in lump sum payments doesn’t affect the size of the monthly annuity payments, by the way. That payment option is still available to my former colleagues.
It’ll be interesting to see what people decide. A well-planned retirement, with time to consider all your choices, is difficult enough to achieve. The stress of a tough decision, with scant time to consider it, is proving to be a real challenge for those approaching retirement.
Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. He enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter @RConnor609 and check out his earlier articles.The post Rates Up Lumps Down appeared first on HumbleDollar.
November 28, 2022
Guessing Game
ALL THIS MARKET turmoil has me thinking about my portfolio—and the things I’m a little hazy about.
One of my stock mutual funds just paid me a capital gains distribution of more than $5,000. I sure wasn’t expecting that. In fact, I wasn’t expecting any capital gains this year. It seems the net gain on the sale of individual stocks within a mutual fund are distributed to shareholders, no matter how the overall fund has performed. It was an a-ha moment for me, but I bet most HumbleDollar readers already knew about such things.
A friend recently asked if I owned any Apple or Tesla stock. My instant reply was no. But that wasn’t accurate. I looked at the top 10 holdings in one of my mutual funds, and both of those stocks are there. So are Chipotle Mexican Grill and dozens of other well-known companies. Who knew?
Actually, I did know, or at least assumed, that large companies would be in a large-cap mutual fund, but I never gave it much thought. When I checked the holdings of my other mutual funds, I found I owned the same stocks but in different proportions across my various funds.
One fund calls itself “balanced,” another “large-cap value” and a third “total stock market index.” Oops, there’s a “large-cap growth index” as well. Am I a major Apple shareholder? I wish.
It would appear I’m not as diversified as I thought. In my defense, there are significant differences in my funds’ investments when you go further down the list of holdings, and I also do hold various bond funds.
Am I a skilled investor? Not even close. Am I an obsessive saver? You bet. Devoting more time to investing might—I emphasize “might”—have given me a higher net worth. But along with my pension, it’s been saving every month since I began working in 1961 that’s assured my financial security and, I hope, a legacy for my family.
When it comes to investing skill, or the lack thereof, I bet I’m more typical than not. When I managed 401(k) plans, I monitored the investment choices of the 11,000 participants. With few exceptions, it appeared that throwing darts at the list of investment options would have rendered better results. Many employees who owned a target-date mutual fund—which is meant to provide a complete portfolio in a single fund—also owned several other mutual funds. Other employees had all their money in company stock.
I’m guessing the reluctance of many Americans to invest is due to both fear of losing money and the complexity of the process. Not investing is a shame because it takes very little to get started. Opening an account for your children, and then funding it with birthday gifts, babysitting money or whatever, can pay lifelong dividends—no pun intended. Yet, as of 2019, just over half of Americans (53%) directly or indirectly owned stocks, according to the Federal Reserve’s Survey of Consumer Finances.
I can hear the wheels turning. Why hasn’t this guy used an investment advisor? I could make up several excuses. But I suspect the truth is, I’ve always been too cheap. When I recently consolidated all my investments with Fidelity Investments, I asked about hiring an advisor. I was quoted a fee of about 1% of assets. My internal calculator instantly rejected the idea. We’ll never know if I made a mistake.
The post Guessing Game appeared first on HumbleDollar.
What Do You Want?
AT A VULNERABLE time in my life, I went to a “quantum healer” who said my deceased mother was trying to ask me, “What do you want?”
I kept saying “I don’t know” to the healer and she kept repeating the question, until the answer popped out unexpectedly, “I just want to be alone right now.” The healer said my mother was clapping. That was exactly what I needed to hear to help me clarify my thinking.
I believe that “what do you want?” is the most important question we can ask not just ourselves, but also others. If we don’t consciously identify what it is we really want, how likely are we to achieve it?
I knew a man who lived and breathed real estate. He got his real estate license but he never used it. Every time he got near success, he would come up with some reason he couldn’t do it. He remained unfulfilled and complained his whole life. He never believed that he could get—or perhaps deserved—what he wanted.
I now understand that we accept into our life what we think we deserve. There’s a saying that goes along with this notion: “If you believe it, you can achieve it.” So, what is it that you really want?
Early on, it was clear that what I wanted most in life was a belief system that worked for me, to be married and to be a mother. It took a lot of living to make all of those things my reality.
I realize now that for years I unconsciously believed that, to be a good mother or even a good person, I needed to continually sacrifice my own needs and desires. By the time I met the love of my life in my mid-50s, I was prepared to live the life I truly wanted. To get there, however, I had many experiences that clearly defined what I didn’t want.
What does all this have to do with money? If I identify what I want financially, it’s more likely to happen than if I’m vague about it. What wants have I identified for myself?
I’ve been working my entire adult life. I now realize that I want to work as long as I love it, can set my own schedule, feel valued and am genuinely contributing. Right now, I have the perfect job for me, one where I set my own hours.
Physically, there’s a point where work is actually good for me, and a point where it becomes unhealthy. I have enough financially to survive in retirement, but I do love the freedom that comes with more money. If it comes easily, I will continue to acquire it.
In fact, I know I tend to hoard money. My husband helps me spend it on experiences that we’ll treasure forever. As I write this, I’m listening to the birds from a lanai in Molokai, Hawaii.
I’m still working on questions about my retirement. What will motivate me when I no longer have a job? What will I do to feel inspired, to get up and out every day? Will my self-worth and motivation suffer when I’m no longer showing up and being useful in a financial way?
I know I don’t want to be dependent on anyone else financially. I want options, especially as I age. As a nurse, I’m familiar with caregivers who look after their grown children, while risking their own future.
It’s surprising how many people know nothing about what they should be doing to prepare for their future. Many are so anxious they won’t even look at what needs to be done. They’re so overwhelmed by distractions, enticements and fearful news that they don’t make any deliberate changes.
What I find most disturbing is that many of these people feel it’s honorable to take care of their family before themselves, even when they’re putting themselves at risk. They have irrational guilt about taking care of themselves. At one time, I did, too. But here’s the obvious thing: Not taking care of yourself doesn’t help anyone.
I’ve adopted some financial principles related to helping others that keep me on track:
My first responsibility is to provide for myself, so I don’t have to ask for help. That includes saving for retirement, being resourceful and taking care of my health.
An inheritance is not a right. My family will get whatever is left when I die. If I die soon, they’ll get more. But I plan on living a very long life and I can’t predict how much I’ll need to provide for myself.
I won’t take more responsibility for others’ well-being than they do.
If others want help from me, they should negotiate with me. I love to help, and it’s even better when there’s a mutual benefit of some sort.
If others don’t show appreciation, or they’re irresponsible with a gift, they shouldn’t expect more. It’s not that I don’t want to be generous. I just want to do it in a way that counts for something.
Focusing on what you really want may seem selfish. But I see it as being responsible. I believe everyone should take care of themselves to the best of their abilities. I want everyone to have the life they desire—but that doesn’t usually happen without deliberate thought and without asking, “What do I want?”
Marla McCune is a registered nurse with a career spanning 45 years. She also loves journaling and outdoor activities, including swimming, photography and gardening. Marla's previous article was Finally in Charge.
The post What Do You Want? appeared first on HumbleDollar.
November 27, 2022
Just Say Noël
MY FAMILY IS FRUGAL all year long, even during the Christmas season. We’re modest with our gifts and sparing with our decorations. Each year, our sprucing up consists of one cut-your-own Christmas tree trimmed with the same ornaments we used the year before. I can’t say the same for our neighbors. They pull out all the stops to create a seasonal spectacle.
There’s no need to take a long, cold sleigh ride to the North Pole to scope out Santa and his companions frolicking in snowy splendor. A short drive around my neighborhood reveals reindeer prancing across lawns and elves dancing in doorways. Santa himself strolls among candy canes or climbs down the chimney with a sack full of goodies. Strings of lights festoon trees, fences and eaves. It’s just as well Mrs. Claus stays home on Christmas Eve. She would be holly green with envy if she could see the dressed-up digs around here, and Santa’s wallet would be a lot lighter.
I’ve never been tempted to follow suit before. But this year, I decided to see what all the fuss is about—and how much it costs to be fussy.
With that in mind, I sat down one evening for some e-commerce on the computer. As a Noël novice, I know I can’t compete with the decorating doyens right out of the starting gate. I just hope to raise our neighborhood standing a couple of notches by adding a little more Christmastide curbside appeal.
Icicle lights for the eaves at $24 a strand seemed like a painless beginning, until I realized I needed five to span the distance. Holiday necessity also demanded a $24 single strand for the rest of the roof, along with seven lighted green garlands for the porch columns at $40 each. The house will be well lit for just $424.
I can’t leave the windows without the Christmas treatment. Some $320 would put a cheery wreath in 12 of them, plus $65 to dress up the front door. Total so far: $809.
Our newfound Christmas image is incomplete without a three-piece, lighted family deer set for $240. And for $53 more we’ll have a candy cane pathway coaxing visitors toward the front door. These additions make the outdoor bedecking complete for a mere $1,102.
Once inside, guests will find our messy tree farm specimen replaced by a pre-lit, “real feel” full Downswept Douglas fir. It’s a bargain at $435.98, marked down from $799.99. Extension cords, assorted holiday gewgaws and taxes take the decorating total close to $2,000. And, no, that doesn't include the 10-foot-tall inflatable, Santa-garbed Grinch.
Let’s face it, for that much green, we could abandon our parsimonious habits and get downright decadent with our gift-giving. Or we could motor over to the next state and marvel at some world-class Christmas glitter.
Tempting as those merry visions may be, I think it’s safe to say we aren’t joining the Joneses in their festive illuminations this year. We’ll just take our usual leisurely drive around town to appreciate their exertions from the cozy comfort of our warm car. While my wife and daughter ooh and ah, I’ll try to hide my glee over the time and money I didn't spend-–yes, my first two initials could stand for Ebenezer you-know-who.
Meanwhile, to pick out our Yuletide centerpiece, we’ll squeeze into the cab of the old pickup truck and head over to our favorite Christmas tree farm. Once there, the hardest task is choosing the almost perfect tree. The easiest is paying $35, which includes a complimentary cup of hot cocoa. Then, it’s home to hang the trimmings, with holiday music playing in the background. Christmas spirit? That’s all I need.
The post Just Say Noël appeared first on HumbleDollar.
Never Simple
Perot’s campaign for tax reform didn’t make much progress, but many can sympathize with his frustration. Because of the complexity of tax rules, financial planning often ends up feeling like the children's game Operation—with penalties for even the slightest misstep and confusion around every corner.
I recall, for example, speaking with a fellow who was approaching his 70th birthday. He noted that his plan was to defer Social Security to increase his monthly benefit. That made sense. But then he mentioned in passing that this would entail waiting two more years, until age 72.
I was glad he mentioned this, because Social Security benefits hit their maximum at age 70, not 72. If he’d waited until 72, he would have unnecessarily surrendered most of the two years of benefits he could have received. It’s a common point of confusion. Age 72 represents another financial milestone: when we’re required to begin taking distributions from tax-deferred accounts, such as 401(k)s and IRAs. Retirees live in fear of this particular deadline because the penalty for missing a required minimum distribution (RMD) is unusually harsh: a full 50% of what should have been distributed.
The RMD and the Social Security deadlines used to be much closer together. Until 2018, the deadline to begin RMDs was age 70½. While that was an odd deadline, at least it coincided more closely with the Social Security deadline.
In the world of personal finance, there are many similar pitfalls. Below are six that, in my view, are most important from a planning perspective.
1. The “still working” exception. As noted, the new RMD deadline is age 72. But there’s an exception: If you’re still working and a participant in your employer’s retirement plan, you can typically delay RMDs until you retire. But there’s an important wrinkle: This exception applies only to your current employer’s plan. If you have an IRA or a 401(k) from an old job, the exception doesn’t apply to those accounts. You could roll over the assets in those old plans into your current plan to bring them under the umbrella of the exception. But if they remain separate, then the usual age-72 deadline applies.
2. Qualified charitable distributions (QCDs). This is a popular strategy to tamp down the tax impact of required minimum distributions. Gifts to charity that are made directly from a tax-deferred account help satisfy your RMD while also sidestepping income tax on the sum donated. But for whatever reason, when Congress changed the RMD rule in 2017, it didn’t change the rule applying to QCDs. Under the new rules, RMDs aren’t required until age 72, but QCDs are still permitted after 70½. If you’re looking to reduce the size of your IRA before RMDs kick in, this provides an additional window. Keep in mind that QCDs are limited to $100,000 per year.
3. Tax rates. Search online, and it’s easy to find tables clearly mapping out the tax brackets. The problem, though, is that these brackets apply only to your “ordinary income.” This includes W-2 and self-employment income. It also includes interest earned from bonds and bank accounts. Short-term capital gains and some dividends are also taxed at the same rate as ordinary income.
A different, and usually more favorable, set of rates applies to long-term capital gains and to qualified dividends—dividends from stocks that had been held for at least 60 days. Capital gains rates are either 0%, 15% or 20%. But in addition, a 3.8% surtax applies to married couples with adjusted gross income (AGI) above $250,000 and single filers with incomes over $200,000. Result? Depending on your total income, capital gains might be taxed at the federal level at anywhere from 0% to 23.8%.
A final point on capital gains: Keep in mind that some states have special tax rates for short-term capital gains. Massachusetts, for example, taxes short-term gains at a punitive 12%, while long-term gains under current rules are taxed at just 5%.
4. The backdoor Roth IRA. This is a tax strategy favored by those with incomes too high to contribute directly to Roth IRAs. It consists of two steps. First, an investor contributes to a traditional IRA. Then, he or she completes a Roth conversion to move those dollars into a Roth IRA.
It’s not too difficult, but there's a wrinkle to be aware of: If you have any other tax-deferred IRAs, you’ll want to be careful about completing that second step. Because of something called the “aggregation rule,” this second step can end up being taxable—something you want to avoid. This isn’t a problem if you have other tax-deferred accounts, such as a 401(k), and indeed that presents a potential solution. In a lot of cases, IRAs can be rolled over into 401(k)s, but this needs to be completed before the end of the year if you’re planning to complete a backdoor Roth contribution.
5. The once-per-year rollover rule. If you’re completing a rollover from an IRA to a 401(k)—either because you’re getting ready for a backdoor Roth contribution or simply because you’ve changed jobs—keep in mind that there are two ways to complete a rollover, and one of them carries risk.
The first is called a direct transfer. That’s when your old employer’s plan makes a check payable directly to your new plan. That’s the method I recommend. The second is riskier. When you leave your old plan, the provider might make a check payable to you, rather than to your new plan. You can then deposit this check in your bank before writing a check to deposit the funds into your new plan. This is risky in two ways. First, this process must be completed within 60 days. Otherwise, it will be treated like a liquidation of your old account, making the balance fully taxable—a disastrous result.
The second risk: Even if you successfully complete a distribution within 60 days, the IRS limits rollovers like this to just one in any 12-month period. If you’re trying to consolidate old 401(k)s—a worthy goal—it’s important to tread carefully. It would be easy to inadvertently run afoul of this limitation.
The safest route: Always opt for a direct rollover or transfer, sometimes referred to as “trustee to trustee.”
6. Deductions for charitable gifts. Suppose you make a gift to charity. Can you claim a tax deduction? Assuming you itemize your deductions, the simple answer is yes. But at least four different limits apply—depending on both the type of charity you’re donating to and the type of asset you’re donating.
The first distinction is based on the type of charity. Two types of organizations are eligible for deductions. The first includes the most common types of nonprofits, including schools and religious institutions. It also includes donor-advised funds. The second, smaller group includes veterans’ groups, fraternal organizations and a handful of other types of charities.
Gifts of cash to the first type of organization are currently limited to 60% of a taxpayer’s adjusted gross income, while gifts of cash to the second type of organization are limited to 30% of AGI. In 2026, these rules will change, but for now these are the limits.
Gifts of appreciated securities—for example, a stock that has gained in value—are subject to different limits. For the first type of charity, it’s 30% of AGI and, for the second, it’s 20%. For both types of organizations, it’s important to note that the appreciated security must have been held for more than one year to receive a deduction for the current market value of the asset, which is what you’d want. If the asset has been held for less than one year, only the cost basis of that asset can be taken as a deduction, thus defeating the purpose of donating an appreciated asset.
In all cases, if one of these AGI caps limits a deduction, the unused portion of the gift can be carried forward and deducted in a future year—but you only have five years to take advantage of the unused sum.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.The post Never Simple appeared first on HumbleDollar.
November 25, 2022
New Rules for Success
FOUR DECADES OF falling inflation and declining interest rates have come to an abrupt halt—and that’s changed the calculus on a fistful of financial decisions.
Want to make smarter money choices in the months and years ahead? Here are seven new rules for financial success:
1. Carrying debt is less foolish—in some cases. Thanks to inflation, families can now repay the money they've borrowed with depreciated dollars. That won’t help you with credit card debt, where interest rates have soared along with inflation, thus ensuring that carrying a card balance continues to be the height of financial foolishness.
But if you have a fixed-rate mortgage from before 2022 or a low-interest car loan, your debt is shrinking rapidly in inflation-adjusted terms, thanks to the 7.7% spike in the Consumer Price Index over the past 12 months. The implication: Don’t rush to rid yourself of these debts.
2. Buying bonds beats paying down older mortgages. I’ve long been an advocate of paying down debt, including mortgage debt, because the interest rate owed was usually higher than the interest rate you could earn by buying high-quality bonds.
But that’s likely not true for anyone who took out a mortgage before 2022. Got a fixed-rate mortgage that’s costing you 3%? Now that 10-year Treasury notes are yielding 3.7%, up from 1.5% at year-end 2021, and corporates are paying even more, you’re probably better off buying high-quality bonds than prepaying your mortgage. What if you took out a mortgage this year, which might be costing you 6% to 7% in interest? Making extra-principal payments is still a smart strategy.
3. Asset location matters once again. When bond yields dropped to minuscule levels in 2020, some financial experts noted that holding taxable bonds in a regular taxable account was no longer a problem, because the tax owed on the interest received would be tiny. But with bond yields climbing along with inflation, it’s time once again to keep your bonds—except for municipals, of course—in a retirement account, so you don’t have to pay income taxes each year on the interest you earn.
4. Extending bond maturities is more appealing. For the bond portion of my portfolio, I’ve long stuck with a mix of short-term conventional and inflation-indexed government bonds. But I'm toying with shifting some money into intermediate-term bonds.
To be sure, the yield curve remains inverted, with two-year Treasury notes kicking off more interest than 10-year Treasurys. That’s prompted some folks to declare that “cash is no longer trash” and that the place to be is money market funds, Treasury bills and short-term certificates of deposit. Problem is, today’s high short-term rates may prove fleeting.
Whenever the Federal Reserve decides inflation is under control or that the bigger threat is a recession, it’ll start cutting short-term interest rates. Result: Today’s handsome cash yields will disappear. Investors might imagine they can shift into bonds at that juncture—but, by then, intermediate- and longer-term yields will likely also have dropped. The upshot: If you want to lock in today’s more generous yields, consider swapping your cash for intermediate-term bonds in the months ahead.
5. Bonds again offer the chance to beat inflation. We can't know for sure what will happen with interest rates and inflation over the next few years. But we do know it’s now possible to outpace inflation with bonds—if you purchase inflation-indexed Treasury bonds and Series I savings bonds.
Today, 10-year inflation-indexed Treasurys are paying 1.4% more than inflation, while Series I bonds are currently offering 0.4% above inflation. By contrast, until recently, Series I savings bonds offered no interest over and above inflation, while inflation-indexed Treasurys sported a negative after-inflation yield.
6. Selling a home has become costlier. It isn’t simply that you might need to slash your asking price to find a buyer amid today’s much higher mortgage rates. On top of that, if you have a mortgage, selling and then buying could mean both giving up your current low-interest-rate mortgage and taking on a much higher-rate mortgage to purchase the new place.
7. Future profits are less valuable. As interest rates have climbed, banking on the distant future has lost its appeal. Risking money on an investment that might not pay off for 10 or 20 years—and might never pay off—may have seemed okay when bonds barely yielded 1%. But now that you can pocket a 5%-plus yield on many high-quality bonds, a high-risk investment has to be awfully compelling to attract investors.
Result? Goodbye, cryptocurrencies and nonfungible tokens. What about growth stocks? Their potential for hefty corporate earnings down the road now seems like a more distant promise—and one that might be broken. By contrast, value stocks, with their healthy current earnings and often high dividend yields, have become far more appealing. After all, why speculate on the future when you can collect a handsome dividend check today?
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 New Rules for Success appeared first on HumbleDollar.
On My Own—But Not
WHEN I ANNOUNCED I’d be retiring at age 55, the most frequent question I received from friends was about how I’d pay for health insurance. They knew I wouldn’t be eligible to receive Medicare for a decade. They also knew paying for 10 years of premiums would likely leave a large crack in my nest egg.
Fortunately, I was able to take advantage of a health insurance benefit provided by my former employer. As an early retiree, I’m eligible to receive health care coverage for the rest of my life. It’s a benefit no longer offered to new employees.
I maximized the benefit by retiring on my 55th birthday—the first day I was eligible to receive it. For the next 10 years, my former employer will pay a sizable portion of my health insurance premiums. Once I become eligible to receive Medicare, my old employer will provide me with a monthly stipend to purchase whatever supplemental coverage I want.
In 2023, my former employer will pay a total of $8,790 toward the cost of my health care coverage. That’s equivalent to two months of my take-home pay at the time I retired. I have to pick up a portion of the premium cost. Starting in January, my share will be $173 a month.
In October, I received my open enrollment information. Since my husband and I relocated to Arizona after I retired, I’m limited to one option for insurance coverage. But that option allows me to receive care from any provider within the U.S.
Out of curiosity, I wanted to see how the plan I have compares to those available through the health care exchange set up under the Affordable Care Act (ACA). I discovered there were no ACA plans with a $1,000 deductible, which is what my current plan has. Looking at plans with a $2,000 deductible, there were three options. The least expensive of those would cost me $1,354 a month. That plan came with an annual out-of-pocket maximum of $8,700. My current plan has a $3,000 maximum.
It wasn’t clear to me if the ACA plan would allow visits to the hospital and clinics located in the retirement community where I live. Having the ability to see providers—whose offices are less than two miles from my home—is a convenience I can’t put a price on.
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America the Drivable
I'M BASICALLY A BORING kind of guy. I’ve been known to fall asleep during a raging house party. But when it comes to travel, you’ll find me wide awake. It’s one of my favorite things to do.
Given the hassle of international travel right now, Connie and I decided to see more of the U.S., rambling from state to state, planning no more than a day or so in advance.
We’ve just finished our third cross-country road trip since 2014. We had two goals for this trip: to complete visiting all 50 states and to see the locations of my wife’s favorite HGTV shows—first Indianapolis, then Waco, Texas, and finally Laurel, Mississippi.
Oklahoma was one missing state, and I wanted to see the memorial to the Oklahoma City bombing. Our most distant target was Idaho Falls, just because we hadn’t been to Idaho. There we stumbled onto the Idaho Potato Museum and had a baked potato smothered in beef stroganoff. What more can you ask for?
Along the way, we found the birthplaces of Thomas Edison in Ohio and Herbert Hoover in Iowa. Did you know Edison went bankrupt at age 18 and Hoover was an orphan at seven? It’s amazing what you can learn when you pay attention to those roadside historical markers.
Several weeks ago, Rick Connor recounted his recent road trip. At age 65, Rick is still in the go-go years of retirement. By the usual measures, Connie and I are not, given our ages of 79 and 83. “Balderdash,” I say. People with the means and reasonable health don’t think about averages or norms. Instead, they press on for as long as possible.
Our road trips are about seeing this great land, learning its history and meeting people who lead lives very different from ours. If I stand next to someone for more than five seconds, I strike up a conversation.
I learn how similar and how different we can be. A group of bikers, a minister, and a fellow from the Alabama town where I was stationed in the Army 50 years ago all fell prey to my questioning. At restaurants, servers are a great source of insight into local events.
There are some rules to be followed. When you’re “in the middle of nowhere” and talking to a local, don’t say that to them. Remember, you’re actually in their hometown, and their family may have lived there for generations.
At one stop “in the middle of nowhere,” I asked a local how people earn a living. “There aren’t as many jobs as there used to be, but we have the coal mine and the natural gas wells,” was the reply. This was not the time for a discussion about global warming.
I enjoy driving. Connie doesn’t drive much since losing sight in one eye. In total, we traveled 7,000 miles in a little over three weeks. The U.S. has such an incredibly diverse landscape. It’s impossible to describe. Neither words nor photos can come close.
Sixteen percent of Americans have not left their home state, according to a recent survey. Many Americans have no desire to travel, which is beyond my comprehension. The only data I could find said the average American has visited 12 states. There’s no reliable data on how many of us have visited all 50 states, but it’s relatively few.
As I drove across the prairies of Nebraska and Wyoming, I thought about those early pioneers walking those endless miles, month after month. Imagine what they thought, after all that time, looking over the next hill and seeing the Rocky Mountains facing them.
“Another fine mess you’ve gotten us in, Pa. Now, what are we supposed to do?”
“Just keep going, Ma, keep going forward.” Thankfully, they did.
Once, as we were driving in Montana, I thought I saw an Indian hunting party atop a distant hill. Or maybe it was my imagination since we’d just visited an old Indian buffalo hunting ground.
Many times, I’ve heard that spending money on experiences is far better than on stuff. I fully agree, but what you experience also makes a difference. My idea of a great experience isn’t a $12 turkey leg in one hand while waiting to shake hands with a four-fingered mouse. Rather, I get a thrill from watching Navaho horsemen wrangling their flock of sheep, or driving the mountain roads of Zion National Park with no guardrails, or seeing 100 hot air balloons ascend at once.
When we take a road trip, we begin with a vague itinerary and no budget, although I know where the money is coming from—our travel account. On this trip, we spent about $45 a day on gasoline and a total of $4,280 on hotels. Food added some $1,800, including tips. Admissions and miscellaneous charges boosted the tab by roughly $1,200. Altogether, the 23-day trip cost $8,315.
My preferred mode of travel is a comfortable sedan and a comfy hotel room each night. I realize others see it differently. Still, how does emptying an RV’s grey water each night count as fun? To each their own. As I pass a middle-aged couple driving a $60,000 pickup truck towing a $40,000 RV towing $20,000 worth of motorcycles, I’m thinking, “Have they fully funded their IRA?”
I filled the gas tank each night. When driving out West, there are times when gas stations are few and far between. If you run out of gas on some roads, you’ll be on the missing persons’ list in short order. If you have a favorite gas station—perhaps so you can earn points—good luck. Take what you can get.
Dining can be a challenge. We avoided fast food as much as possible in favor of local restaurants, but many times we ended up in chains like Olive Garden and Cracker Barrel. We even found a Jersey Mike’s sub shop in Arizona. BBQ at a famous Texas restaurant was a disappointment, but gumbo on top of jambalaya in Louisiana was a winner, as were the beignets.
Watch your speed. Traveling down an interstate highway on the Great Plains, with no trees on either side to give you a sense of speed, you can easily find yourself cruising at 90 miles per hour without realizing it. The open spaces are tempting for this former rally car driver, and I love to push the limits.
If the posted speed is 80, I figure they mean 90, but don’t count on it. My personal best is 115 mph. I was headed to 120, but Connie woke up murmuring something about a crazy old man. Driving along I-80 at 75 mph is not a good time to open the sunroof. It will test your eardrums and, trust me, all the screaming wind will not suck that fly out of the car.
Resist tchotchkes. A stuffed Armadillo may be cool in Texas, but not so much in your living room in Connecticut. That cowboy hat only looks good on a cowboy west of the Mississippi.
What does an old couple, married 54 years, do confined in a car for hours at a time? That’s a piece of cake. Try a ship’s cabin for weeks. Believe it or not, we talk on the road more than at home.
When something comes up that we question or want to learn about, we always have our companion. “Hey, Siri.” On long road trips, we develop a special relationship with her. Connie has even taken to saying “thank you.”
Oh, yes, there’s always the license plate game. The goal is to see a license plate from every state. We saw all 50 states and Guanajuato, Mexico. Believe it or not, Alaska and Hawaii are not the hardest to find. It takes so little to make me happy. If you’re really ambitious, you can count wind turbines. Thousands upon thousands are changing the landscape.
GPS makes travel so easy. My car has a GPS, but it’s a bit out of date, so I prefer Waze. I prop my phone on the dash and we’re good to go. It’s not perfect, though. Get too far off the beaten path and you’ll drive it nuts.
While searching for St. Anthony Sand Dunes in Idaho, I sensed frustration from Waze. We seemed to be going in circles. I was expecting a snide remark such as, “Use a map next time, for Pete’s sake.”
I’m told it’s possible to drive all the way to South America, except for the 90-mile gap between North and South America. That trip may be beyond even those in the go-go years. Where to go next? Canada maybe?
Richard Quinn blogs at QuinnsCommentary.net. Before retiring in 2010, Dick was a compensation and benefits executive. Follow him on Twitter @QuinnsComments and check out his earlier articles.
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