Jonathan Clements's Blog, page 191

Working Away

EVEN BEFORE COVID-19, I was no stranger to working remotely. From 2011 until I retired in 2018, I worked for a major bank from my home office. I started working remotely a few days a week and then, in 2013, requested to work fulltime from home. This was met with skepticism from friends, colleagues and supervisors.

They had concerns that working remotely would make it difficult to connect with others and to get promoted. ���Out of sight, out of mind��� was a common warning. But during my remote work period, I received two promotions with large pay increases. I was also selected to join an exclusive 10-month leadership pipeline program. I mention this not to brag but to demonstrate that it���s possible to thrive while working remotely.

Like the idea of working from home? Here are 11 strategies that helped me:

1. Have a dedicated workspace. There can be more distractions at home than at the office. A quiet, dedicated and preferably isolated work area can minimize distractions.

2. Dress for success. Many people advise you to dress for the job you want. Studies show that how people dress at the office affects how they���re perceived. Even when working remotely, I found it was still important to dress for success, not to impress others but to mentally tell myself that the workday had started.

As soon as I woke up, and after a cup of strong tea and meditation, I changed out of my pajamas to comfortable daytime clothes. Nothing fancy. It could be a thick sweater and sweatpants in the cooler months, or a light comfortable T-shirt and pants in the hotter months.

Changing clothes was a way to tell my brain to switch into work mode. It���s similar to players donning a team uniform before a game. One of my sons who works from home now also uses this tip. In addition to getting dressed for work, he always puts on a belt. He uses the belt to signify that he���s mentally ready to ���buckle up��� and start his workday.

3. Don���t break your brain. Take frequent short mental breaks, preferably outside. Because my manager and most of my colleagues were on the East Coast and I live in Texas, my day usually started early, at 7 a.m. Most days began with meetings for several hours. By 11 a.m., I was mentally tired. What worked for me were mental breaks of 10 to 15 minutes each. I usually made an effort to go outside to my courtyard. Getting fresh air and seeing greenery always helped to clear my mind.

4. Do something physical midday. The law of diminishing returns applies to work. Taking a longer break around lunchtime or early afternoon, so I could get some exercise, worked well for me. I usually went for a run or walk, or worked out to get my heart rate up and break a sweat. I was then more productive and sharper mentally in the afternoon.

5. Pay attention to ergonomics. For a short time, it may be okay to work from the couch or the kitchen chair. In the long term, these habits can harm your body and health. A year after COVID hit, people who had started working from home were reporting more��back pain because of bad posture.

It���s especially important to have your workstation set up ergonomically to prevent problems. I invested in a height-adjustable desk so I could either sit or stand while working. Also pay special attention to the three Es���eyes, elbows and ears. The monitor should be at eye level to prevent neck and shoulder strain. Elbows should rest at a 90-degree bend in the arm. Ears demand excellent quality headphones so your head and neck can be straight upright when on the phone, which may be for many hours a day. I always liked to stand and pace while on the phone. It was not only healthier but also kept me engaged and alert.

6. Don���t disconnect from colleagues. I made an effort to stay in contact with key colleagues. I scheduled recurring virtual one-on-one meetings with them, as well as with my manager. Most of the time, we used the meeting to update each other on projects. If we got caught up on work, we used the remaining time to get to know each other personally. The more time you spend working remotely, the more effort it takes to stay connected.

7. Have rules for remote meetings. Virtual meetings can be a challenge because people can more easily get distracted. I���ll admit that I was guilty of letting my attention wander, the result of multi-tasking during online meetings. For the meetings I organized, I tried to minimize this from happening. How? I usually kept meetings to under 30 minutes. Most people were willing to accept an invitation to a short meeting. They also tended to stay more engaged if the meeting was just 15 to 30 minutes, rather than an hour.

8. Don���t let meetings go long. Be respectful of participants��� time by not going past the meeting���s scheduled end time. If you must, ask for the okay of those on the call. Don���t be the ���oh, one more thing��� person who sends meetings into overtime.

9. Have an agenda for each meeting and stick to it. Most important, share the agenda beforehand so that everybody knows what to expect and so the meeting can stay on track.

10. Summarize a meeting���s outcome. Before each meeting ended, I would give a recap and then follow up with an email covering the takeaways. This would include any actions we���d agreed to take, including who was responsible for each item.

11. Set boundaries. Sometimes, I worked more hours than I wanted to, especially after my sons left home for college. To draw a line, I would often schedule to play tennis with friends in the evening after work. It forced me to change out of my work clothes and focus on my free time.

Jiab Wasserman, MBA, RICP��, has lived in Thailand, the U.S. and Spain. She spent the bulk of her career with financial services companies, eventually becoming vice president of credit risk management at Bank of America, before retiring in 2018. Jiab lives in Texas with her husband Jim, who also writes for HumbleDollar. She's an advocate for addressing the issue of gender inequality. In addition to writing and playing tennis, Jiab creates and sells art, which is available through her online shops. She and Jim are working on a new book, due out in 2023, that examines the impact of social media influencers on youth consumerism and identity development. Head to Linktree to learn more about Jiab, and also check out her earlier articles.

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Fill Them Up

THE S&P 500���S RETURN so far in 2022, when compared to the same year-to-date stretch for previous years, ranks as the fourth worst since 1928. One result: Stocks look quite cheap. The market���s price-to-earnings (P/E) multiple has retreated as share prices have fallen while corporate earnings have continued to grow.

One chart in particular caught my eye last week. Each month, I peruse J.P. Morgan Asset Management���s Guide to the Markets. There was a graph that split the S&P 500 into its top 10 holdings and the index���s remaining 490 components. The P/E ratio for the top 10 is 24.7 and just 14.6 for the rest. Most of the S&P 500 is now priced below its historical average valuation.

It���s a reminder that, after a summer of volatility, it���s a great time to put money to work in stocks. Year-end is approaching, so it���s important to top off your 401(k) and make your full annual IRA contribution. If you can���t hit the $20,500 annual 401(k) cap ($27,000 for those age 50 and older), be sure to contribute at least enough to capture your employer���s full match.

Also don���t forget to invest money in your health��savings account (HSA). While many people leave their HSA sitting in cash and then use it for routine health-related expenses, a smarter move is to invest in low-cost index funds. Use your checking account to cover today���s health care costs and leave your HSA to compound. Money in an HSA grows tax-deferred and can be withdrawn tax-free at any time for qualifying expenses. Just be sure to save your medical receipts, which you can then use years later to shelter your HSA withdrawals from taxes.

What if you���ve been neglecting your 2022 retirement account contributions? You���ve lucked out. How so? Thanks to the stock market swoon of recent weeks, today���s prices aren���t much above their mid-June lows.

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Shades of Green

YOU MAY BE FAMILIAR with the term ESG. This is an investment approach that���in addition to traditional financial metrics���also weighs environmental, social and corporate governance considerations when picking investments.

ESG isn���t new, but it���s stirred up a fair amount of controversy recently. As an investor, it���s worth understanding what the debate is about and how you might navigate it.

ESG has been around for years, but its��popularity has recently hit an inflection point. According to��Deloitte, the number of investment firms offering at least one ESG fund has tripled since 2016. One new fund even carries a celebrity endorsement. NBA star Giannis Antetokounmpo has partnered with the investment firm Calamos to roll out an ESG fund. According to Calamos, the goal of the new fund will be to ���generate investment and societal returns��� and to ���inspire, drive greatness, and contribute to a world of wellbeing and prosperity for all.���

Those are lofty claims���and Calamos isn���t alone in using that kind of language. As a result, the Securities and Exchange Commission has started taking a harder look at funds that embrace the ESG mantle. Last year, the SEC issued a��risk alert��for consumers. This year, it took a further step,��proposing��new rules to police how firms like Calamos market��their funds. Under the new rules, firms would no longer be permitted to use the term ESG as freely. Instead, to aid consumers, the SEC wants fund firms to disclose in a standardized format how they���re employing ESG strategies.

With the proliferation of ESG funds, consumers, too, have been asking more questions. A common accusation is that many ESG funds are engaged in ���greenwashing.��� According to this argument, these funds differ only minimally from a standard market index fund���but cost much more.

Fund expert Nate Geraci, for example, recently��highlighted��a group of the largest ESG funds. All were much more expensive than a typical S&P 500 index fund but differed almost imperceptibly from the index. Two-thirds of them had correlations with the S&P of 95% or higher. The implication: Fund companies are taking advantage of ESG���s growing popularity to overcharge well-intentioned consumers.

ESG has also become something of a political football. On one side, progressives like Sen. Elizabeth Warren have been��pressuring��the SEC to impose new environmental disclosure rules on public companies. She wants to make it easier for ESG-oriented investors to vet companies before buying their shares.

Meanwhile, Florida Governor Ron DeSantis has gone in the opposite direction,��instructing��managers of the state���s pension fund to ignore ESG considerations and to focus only on financial criteria in choosing investments.

One fund company went even further. In a��press release, the CEO of Inspire Investing declared, ���We hereby renounce ESG.��� With that, his company eliminated the ESG label from its entire lineup of funds. The press release went on to say that ESG had been ���weaponized��� by those pursuing a ���harmful, social-Marxist agenda.��� The language was bombastic. At the same time, though, it���s an indication of where things stand in the argument over ESG: There���s plenty of debate���but not a lot of clarity.

With all these cross-currents, how should investors proceed? I would start by asking four questions:

1. What���s your most important objective?��Some investors choose ESG mutual funds as alternatives to standard index funds because they simply don���t want to be shareholders of certain types of companies. Tobacco is a common example. Personally, I hate that I indirectly profit from these companies when I invest in the S&P 500.

That���s one reason you might apply an ESG lens to your portfolio. Other investors go further, hoping to have an impact on companies by allocating their investment dollars to companies they like and away from companies they dislike.

These investors acknowledge that it���s hard for any one individual to have too much of an impact. The thinking, though, is that cumulatively investors could make a difference. Here's how that might work: If more investors choose to buy a company���s stock, that can push up its share price. That could benefit the company in a few ways: It could issue more shares at that higher price. Or it could use its higher-priced shares to issue more stock-based compensation to employees. Either way, a higher share price is almost always a good thing for companies. On the other hand, if enough investors shun a company���s stock, that can put downward pressure on the shares and thus deprive a company of these same benefits.

Those, at least, are the textbook arguments. Because the investment universe is so large and diverse, it���s difficult to know if any ESG-driven investments have ever made, or could make, a difference. That is, in part, because it���s difficult to know the counterfactual: How much higher or lower would a company���s share price be in the absence of ESG investors?

2. What investment options exist?��Perhaps the biggest challenge with ESG investing is that it means different things to different people. The acronym itself, in fact, illustrates the diversity of objectives among investors. A good example is Apple. Some ESG investors like the company because it���s very��charitable. But Apple frustrates environmentalists because its products don���t have replaceable batteries. Result: It���s impossible to say whether Apple is a ���good��� company or a ���bad��� one. It���s in the eye of the beholder.

Gun makers present a similar problem. They���re generally seen as unattractive by ESG investors. But a��recent article��made an interesting counterargument: Weapons manufacturers also help countries���like Ukraine���to defend themselves. Because of that, perhaps ESG investors should embrace them.

The bottom line: If you���re looking to apply an ESG lens when choosing mutual funds, it���s critical to first decide on your objectives. Next, look closely at each fund to see exactly what companies it owns and how you feel about the lineup. Fortunately, there���s a great diversity of ESG funds out there. If you don���t like the way one mutual fund chooses its holdings, it���s possible that another will be a better fit.

I can���t emphasize enough that it���s important to look under the hood before choosing an investment. For example, Standard & Poor���s, in a seemingly��inexplicable��move, recently took Tesla���the leading maker of electric cars���out of its ESG index. That means you won���t find Tesla���s stock in funds like State Street���s��S&P 500 ESG fund��(symbol: EFIV). But you will find that Tesla is one of the largest holdings��in the��iShares ESG Aware USA Stock ETF (ESGU). That's because iShares uses a different index.

3. Is performance a concern?��To the extent that ESG-based portfolios differ from traditional market indexes, their performance will also differ. Will it be better or worse? That���s an open question. There just isn���t enough data yet to say for sure. Indeed, because there are so many different definitions of ESG, it may never be possible to generalize. But it stands to reason that their performance will almost certainly differ from traditional market benchmarks. As an ESG investor, it���s important to decide how much of a risk this represents.

4. Is complexity a concern?��In general, there are three routes to building an ESG portfolio. First, you could pick individual stocks. That would give you the most control over what you own. But I don���t recommend this because of the research required to build and maintain��a portfolio, and��because of the risk posed by individual stocks.

The second option: You could choose a��mutual fund��or ETF. That's certainly the simplest approach. But as I���ve suggested, it can be challenging to find a fund that perfectly matches your values.

Finally, you could go the route of��direct indexing. This would allow you to perfectly tailor a portfolio to your own preferences, including or excluding certain industries or even specific companies. There are downsides, though. Holding a portfolio of several hundred stocks introduces complexity. Also, these services are fairly expensive relative to simple index funds, though that��may be offset if direct indexing results in lower annual tax bills.

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.

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Choosing Happiness

WE ALL WANT TO LEAD happier lives, but that���s no easy task. Our first stumbling block: Most of us aren���t even sure how to define happiness.

Fortunately, philosophers and psychologists have come to the rescue, suggesting that there are two different types of happiness. First up: hedonic happiness. Think of a wonderful party with delicious food, sparkling conversation and all your favorite people in attendance. There���s great momentary pleasure and���fingers crossed���scant pain involved.

Meanwhile, eudaimonic happiness comes from leading a life filled with meaning and purpose. Forget the amusement park, the martini or the shopping spree. Instead, think about things like volunteering, writing a novel, training for a marathon or launching your own business. We're talking about activities that we think are important, we're passionate about, we find challenging and we feel we're good at. These sorts of meaningful, fulfilling activities might allow us to enjoy a��Mihaly Csikszentmihalyi moment of ���flow��� and get us to the top of Abraham Maslow���s hierarchy of needs, where we achieve ���self-actualization.���

It seems any boost in hedonic happiness tends to be fleeting, and we soon return to our personal set point���our base level of happiness. This is the idea behind the so-called hedonic treadmill, where we constantly strive for greater happiness, only to find ourselves running in place. Meanwhile, increases in eudaimonic happiness have the potential to be longer lasting, but such increases also take far more effort.

This division between hedonic and eudaimonic happiness, which has been debated as far back as the fourth century B.C., has moral overtones. How so? Hedonic happiness seems like the easy choice. You go out in the evening for a few drinks with friends and feel temporarily happier, but in the morning you���re back to your base level of happiness and���who knows���perhaps even feeling a little hung over. By contrast, eudaimonic happiness can appeal to our puritanical streak. There���s work involved and challenges to overcome, so it feels more virtuous. We���re striving to be better versions of ourselves and, while we're at it, perhaps also improving the world around us.

Are the two types of happiness mutually exclusive? Yes and no. Imagine making a sumptuous dinner and then sharing it with friends. There would be the eudaimonic happiness associated with preparing a great meal and then the hedonic pleasure of enjoying it with others. You get both types of happiness���but you get them at different times.

Over the past half-century, happiness research has delivered a host of useful insights. There���s the well-known notion that we tend to get greater happiness from experiences rather than possessions. There���s the idea that happiness through life is U-shaped, with our reported level of happiness falling through our first few decades as adults, bottoming out in our 40s and then rebounding from there. There���s the idea that what matters to our happiness isn���t our absolute standard of living, but how we stand relative to those around us���which is why we don���t want to be the family with a six-figure salary in a neighborhood full of seven-figure income earners.

To this array of insights, I think the distinction between hedonic and eudaimonic happiness is a great addition, one that could help us lead a better life. And, no, I don���t think we should favor one to the exclusion of the other. Instead, we should try to design a life for ourselves where we enjoy both.

We're all constrained by money and time. As we think about how to allocate those two limited resources, it���s worth pondering the cost associated with each type of happiness. It strikes me that hedonic happiness usually comes with a higher price tag, while eudaimonic happiness involves a greater investment of time. If we go to a lavish restaurant, we'll get hedonic happiness���and a big bill at the end. But if we decide to learn the piano, we may enjoy long-lasting eudaimonic happiness, but the cost will be a hefty commitment of time.

For those in the workforce, the inclination will be to favor hedonic happiness because, in the course of a busy workweek and perhaps with children to raise, time is in short supply. What about eudaimonic happiness? It is, of course, worth striving for, but it'll take discipline and good time management. Indeed, for those in the workforce, perhaps the best hope for eudaimonic happiness is to find a job they love.

Retirees, by contrast, may have fewer years ahead of them, but more free time during the course of any given week. If we've done a good job of saving, we should have the money needed to buy hedonic happiness. But hedonic happiness alone won't make for a fulfilling retirement. That's where that free time comes in. How will we convert those hours into eudaimonic happiness? For those of us in or near retirement, it's a crucially important question.

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

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Early Start Early End

ELEVEN YEARS AGO, at age 56, I lost my job as a mid-level manager at a Fortune 500 company. I had joined the organization at age 28 with no savings. Twenty-eight years later, I was able to retire at a relatively young age with a pension and a seven-figure 401(k).

During those 28 years, I was passed over several times for promotion to vice president. Instead, I settled into my director-level position, never earning a salary of more than $150,000, plus bonus. Yes, that would be a handsome sum in most parts of the country, but it isn���t in high-cost Los Angeles, where I live.

While I didn���t have as successful a career as I���d hoped, I was���from my first day with the company in March 1982���a firm believer in saving for retirement. I don���t recall receiving any words of wisdom about the importance of starting early on retirement savings. Yes, I had an MBA. But there were no classes on personal finance at the University of California, Los Angeles, when I got my business degree. But the 401(k) came with a company matching contribution, and something told me that this was a no-brainer and that I should capture the full amount of the match.

That proved to be a great decision. As many have written, the power of compounding is one of the ���financial wonders of the world.���

Knowing I had my whole career in front of me, and confident I���d always be able to find work with an MBA from UCLA, I invested my portfolio 100% in stocks. Every year, I contributed the maximum to the 401(k) to reduce my annual taxes. I also made no portfolio changes during either the 2000-02 dot-com bust or the 2008-09 market upheaval. Instead, I stuck with my bimonthly payroll deductions.

I also lived below my means and never paid any interest to a credit card company, always paying off all credit cards in full each month. Admittedly, I didn���t marry until age 41. After marrying, my wife and I had a daughter, making me a joyful dad at age 46. Delaying marriage and not starting a family until my 40s undoubtedly made it far easier to save large sums during my initial working years���a powerful addition to my portfolio���s compounding.

Fast forward to 2011. My daughter was now age 10. I had survived two rounds of downsizing, but lost my position on the third go-around. I was 56. The good news: My 401(k) was worth $1.5 million and my pension was valued at $600,000. Here I was, a millionaire at age 56, thanks to saving from day one and despite never rising above mid-level management.

I received a severance package from my former employer. I set out to look for other work���but without any luck. It seemed my age weighed heavily against me. After a year of looking and after crunching the numbers, I decided to retire, turning my attention to part-time work for a nonprofit.

Regrets? Zero. How has my retirement gone? My family has traveled annually to places far and wide away from our home base in Los Angeles. The value of my 401(k), now rolled into an IRA, is worth more today than it was in 2011, even after this year���s stock market swoon.

The secret: starting early, passive investing and never attempting to time the market. What if I hadn���t started saving aggressively at age 28? This story probably wouldn���t have a happy ending���because I���m not sure how I would have coped with my 2011 layoff and my inability to find another job.

Fred Wallace is retired following a career in marketing and sales. He has been a do-it-yourself investor for most of his life and currently serves in a volunteer leadership role for the American Association of Individual Investors. Fred enjoys golf, skiing, and traveling with his wife and daughter.

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Prepare for Care

YOUR LIFE���S FINAL costly chapter may be paying for long-term care. Indeed, the odds of needing care if you���re age 65 or older are around 50%.

Two key questions: Will you need care for an extended period and how will you pay for it? If the duration is short���which it is for many seniors���paying probably won���t be much of a problem. But if long-term care is needed for many years, financial decisions today might protect the legacy you hope to bequeath decades from now.

Long-term-care (LTC) insurance can take the form of either traditional standalone coverage or a hybrid policy. It���s possible that current standalone policies, after being underpriced for many years, are now priced correctly. Still, I never wanted to make a long-term investment in a policy where premiums could jump if the insurer���s ���costs��� rose.

That���s why I opted for a hybrid policy that ���guarantees��� no increase in premiums. The company I chose for my hybrid policy hasn���t raised premiums on its hybrid LTC policies in more than 30 years, which I find encouraging.

A hybrid LTC policy is one that���s built around either a life insurance policy or a tax-deferred annuity. The basic idea: If you don't need long-term care, your heirs will receive either a tax-free death benefit or the tax-deferred annuity. If you do need care, you���ll receive the benefits tax-free and, in some cases, the monthly benefit can be of unlimited duration. Intrigued? This is a good time to be looking. For the first time in a few years, the cost of hybrid policies has declined, thanks to rising interest rates.

When I bought my policy some years ago, I paid a large lump sum for a second-to-die life insurance policy. Yields on cash investments were incredibly low at the time, so depositing a hefty premium with the insurance company struck me as a good use for my conservative money. But as I���ve further researched hybrid policies, I���ve learned of two other funding methods that are appealing, though they���re also a little more complicated.

One method is to exchange an existing tax-deferred annuity for a hybrid LTC insurance annuity. This is an attractive way to defer the annuity���s taxable gain���and perhaps avoid the tax bill entirely. If the hybrid annuity is later used for LTC, the benefits received are tax-free. The Pension Protection Act of 2006 created this ���loophole��� to encourage the sale of LTC insurance.

I convinced a friend to use this strategy. He had invested $150,000 in a tax-deferred annuity that was now worth $300,000. He exchanged the annuity for an LTC annuity. If he eventually receives LTC benefits from the annuity, he���ll receive the benefits tax-free, thus sidestepping taxes on $150,000 in gains. The annuity covers both himself and his wife. Even though my friend is wealthy and can afford to pay LTC costs out of pocket, the better solution was to receive LTC benefits tax-free, especially given his high tax bracket.

Another funding option might be the most useful: buying the policy with your IRA. Tax-deferred IRA and 401(k) money is often a retiree���s largest investment. After age 59��, when the 10% early withdrawal penalty no longer applies, you might withdraw, say, $6,000 a year from your IRA to buy a hybrid LTC life insurance policy.

After 10 years of $6,000 annual payments, the policy would be fully paid up. If the policy isn���t used for long-term care, it can provide a death benefit for your heirs. To be sure, taxes will be due when the $6,000 is withdrawn each year from the IRA. But that���ll likely be more attractive than paying taxes on $60,000 withdrawn in a single year.

James McGlynn, CFA, RICP, is chief executive of Next Quarter Century LLC ��in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of�� Retirement Planning Tips for Baby Boomers . Check out his earlier articles.

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Backdoor Real Estate

"I���VE GOT SOME REAL estate here in my bag," croons Paul Simon, as he consoles his lover in the iconic 1968 song America.

The real estate industry���s marketing arm couldn���t have put it better. The industry���s message: If you want to feel secure and be prosperous, get yourself some real estate.

Problem is, many people can���t come up with the down payment for a home or rental property. The good news: There���s an alternative to direct ownership. Often referred to simply as REITs, real estate investment trusts are part stock and part real estate. Each REIT is a company that owns and operates perhaps 25 or more rental and commercial properties across the country.

In their early days, REITs were confined to an arcane corner of the stock market. But they���ve achieved a certain pedigree by virtue of their designation as a separate entity of the S&P 500. If I were starting over, I would undoubtedly supplement my privately owned real estate with REITs.

REITs don���t require a down payment or even a minimum initial investment. Subsequent purchases can be made in any amount and on your own schedule, which can be a boon to investors who fund their retirement accounts through dollar-cost averaging. Nor do REITs have to be bought and sold in one swoop. Say you need some quick cash. Instead of suffering through open houses and contract negotiations, you could simply sell a few REIT shares.

Here���s where REITs become not just an acquaintance but a staunch ally in your quest for financial independence: When you buy or sell by pressing a few buttons on your online brokerage account, you incur no commission. That���s right, zero commission and fees regardless of the size of the transaction, though you will lose a little to the bid-ask spread. This staggering advantage to REIT ownership has lured many investors, including those who could otherwise afford the down payment needed for a direct real estate purchase, to instead plunk for REITs as a hassle-free alternative.

Imagine this scenario: You want to sell your small duplex for $500,000 and an eager buyer snaps it up. Pretty awesome, right? But don���t forget to deduct the standard 6% sales commission, equal to $30,000, and closing costs of maybe 2%, or $10,000. So you walk off with $460,000, right? Not quite.

Remember that roof repair and all the primping necessary to get the duplex in shape to sell? There goes another $10,000, reducing your take to $450,000. Still quite an accomplishment. But if instead you���d sold $500,000 of REIT shares, you would have no commission, no closing costs and no annoying pre-sale expenses. You would keep all of the $500,000, the whole enchilada.

Another consideration: Do you have boundless energy and outrageous free time? Are you steeped in the legalese of local rental regulations? Will you have a meltdown when it���s raining and your prospective renter is a no-show? Investor, know thyself. If you just cringed, take refuge in real estate investment trusts.

Okay, so what���s the catch? How risky are these REITs? All investments carry risk and REITs are no exception. But large REITs are only about as risky as the broad stock market and both have averaged about 11% annual returns over the past 10 years. But beware the year-to-year swings. You should be prepared for at least one 30% up and one 30% down year during the next decade.

To neutralize the possibility that one bad apple could be your undoing, consider an exchange-traded fund that focuses on real estate companies. Since each REIT already owns a large number of properties, investing through a fund provides exceptional diversification across many different property types and locations.

The taxman looks kindly on both REITs and direct property ownership, though the tax breaks bestowed on in-person investors are usually thought to be superior. But these benefits are sometimes exaggerated. Take the vaunted depreciation deduction. Sure, private property owners get to take it on their tax return, but it���s ephemeral and must be paid back when they sell. I know, I know, it���s still a no-interest loan and it will receive capital gains treatment, but depreciation is not the boondoggle it���s often made out to be. And besides, do you really think all those buildings held by REITs are not being depreciated?

Every so often, the price of a single privately owned property takes off, but things can also go the other way. The fact is, the returns from direct investments are less predictable than those from REITs. They���re dependent on the landlord���s real estate aptitude, unforeseen developments and just plain luck.

Should inexperienced mom-and-pop investors dig deeply into their life savings to buy one rough-and-tumble piece of local real estate, or instead reap profits from hundreds of properties reaching from coast to coast and managed by industry experts with their own skin in the game? Should you hedge your bets across the two strategies? These are knotty questions that call for professional consultation.

Investing in real estate through REITs does not confer bragging rights. You won���t have a grand Victorian to show off. But as a longtime landlord who currently owns a dozen properties, let me remind you of the upside of hands-off real estate investing: You���ll be able to enjoy a life unfettered by late-night phone calls, deadbeat renters and legal nightmares.

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 Backdoor Real Estate appeared first on HumbleDollar.

August’s Hits

THE MOST POPULAR articles and blog posts last month on HumbleDollar can be summarized with a single word: retirement. These were the most widely read articles:

What's the No. 1 financial risk for retirees? Many folks think it's a big market decline. But a new study suggests otherwise. Rick Connor explains.
Kristine Hayes has only received one piece of financial advice in her life���and, despite her skepticism, she took it. It could hardly have turned out better.
Perplexed by all the financial questions that dog retirees and those saving for retirement? Dick Quinn tries to clear up the confusion.
At age 71, Dennis Friedman wants fewer things to deal with and to worry about, so he's simplifying his finances, sticking with a single medical system, unloading one of his cars and more.
Kenyon Sayler's house has almost quadrupled in value over the past 36 years. He's trying to figure out whether he should be happy or sad about that.
Avoid actively managed, sector, balanced and target-date funds. Favor index funds, especially exchange-traded funds. Adam Grossman details how taxable fund investors can hold down their tax bill.
"If there���s an investment you wish you���d made, it���s okay to remember it," says Adam Grossman. "But don���t remember��only��that. You���ve likely also made lots of good decisions."

An article from late July, The Humble Landlord by Steve Abramowitz, also garnered a hefty number of pageviews in August, as did HumbleDollar's new calculator, the Two-Minute Checkup.

What about our shorter blog posts? The most popular were Greg Spears's Eyeing the Cake, Mike Zaccardi's Cash No Longer Trash, Larry Sayler's The Magic Number, Dick Quinn's Retirement Is Coming and Liquidating Assets, and my piece on A Night on the Town.

Meanwhile, among newsletters, the best read were What They Believed, Made to Measure and We All Want an A.

The post August’s Hits appeared first on HumbleDollar.

This Old House

WHEN WE MOVED to Pennsylvania in 1996, I wanted to buy an old house. After months of looking, we found a stone farmhouse close to my new job and in a good school district. There was just one problem: We didn���t know if we could afford it.

We hadn���t been able to sell our home in Maryland, so we didn���t have any home equity to bring to the table. When our real estate agent saw the asking price, she declined to show us the place because it was out of our price range. She wasn���t wrong.

We drove over to look anyway. It was a stone house with big mature trees. A light snowfall made the property look like a Currier & Ives��print. Our kids ran around the yard, jumping in the creek out front. We had to drive home to get our seven-year-old son into dry clothes. But in just a few minutes, we���d fallen for the place.

From the visit, I got an idea for how we might afford the property. It had a small cottage, separate from the main house, which might provide rental income that we could then use to help cover the mortgage. We still needed a large down payment, however. But I also had an idea for where to get that money. I���d borrow from myself.

First, I rolled an IRA into my new 401(k) plan at work. Once it was transferred, I borrowed the maximum allowed from the plan���$50,000. I���d have five years to repay the loan through automatic payroll deductions. The interest rate was the prime rate plus 1%, as I recall.

Plan loans are the most popular 401(k) feature���after the employer match, that is. At any given time, one worker in eight has a 401(k) loan outstanding. Because you���re borrowing from your own savings, you don���t need a bank���s approval. It���s also easy to apply. Often, you just fill out an online form or talk with a phone representative.

There was still one hitch, however. Borrowing from the 401(k) went against the advice of my new employer, Vanguard Group. It wasn���t a strict prohibition. Vanguard does allow loans from its 401(k) plan. But the company���s stated position was that money saved for retirement should be used only for retirement.

This argument has real merit. It���s hard enough for many Americans to amass enough for retirement. We tend to start saving later in our careers. Many workers also don���t set aside enough each month. Why take money out of an account that may already be too small?

I knew that I was a good saver, contributing as much as I could to the plan. At the rate I was going, I didn���t think there would be a shortfall at retirement. I didn���t want to miss out on other goals. Buying a nice house in a good school district would make my work feel more rewarding.

Vanguard had other, more specific reasons to counsel workers against borrowing. The money would be ���out of the market��� until it was paid back. This meant I would miss out on gains if there was a runup in stock prices. But by the same token, I might avoid a loss if share prices happened to drop while I had a loan outstanding. This was a bit of a toss-up because it depended on timing.

Vanguard���s strongest argument was that some borrowers can���t repay their loans, usually because they lose their job. This can set off a financial avalanche. Any remaining balance comes due in full, usually within 60 to 90 days, depending on plan rules. If the borrower can���t make the balloon payment, the unpaid balance is subtracted from the borrower���s retirement savings. This is reported to the IRS as a taxable distribution, subject to income taxes and usually a 10% early withdrawal penalty.

Under this worst-case scenario, you could lose your job, default on the loan, lose a chunk of your savings and then owe the IRS money. Approximately $6 billion in 401(k) savings are lost this way each year, according to a 2015 estimate by��researchers from Peking University, University of Pennsylvania���s Wharton School and Vanguard. Their estimate was higher than that found in previous studies.

I could imagine a black swan event like this occurring, just not to me. Like most people, I had faith in ���recency������that the current conditions I enjoyed would flow seamlessly into the future. I felt confident that my job was safe and my health would remain good.

That doesn���t always happen, of course, but everything worked out fine for us. As I look back, I realize that I���d taken a big gamble that luckily turned out okay. Yet I���d probably do the same thing all over again in the same circumstances. Like the idea of borrowing from your 401(k)? Here are four suggestions to make such loans less risky:

Borrow infrequently. I took just one loan from my 401(k) during my career. If you borrow, do it for something vitally important, and not for a luxury purchase or a vacation.

One at a time. Some 401(k) plans allow workers to have more than one loan outstanding at any given time. Those who take out two loans or more have a higher rate of defaulting. They���re often borrowing from Peter to pay Paul.

Not an emergency fund. Workers who borrow from the 401(k) to pay the rent or make a car payment could benefit from credit��counseling. People who treat their 401(k) like an emergency fund are living too close to the edge.

Make sure your job is secure. Before borrowing, think carefully about your employer���s financial condition and your relationship with your boss. The most important thing by far is to not lose your job while you have a loan outstanding. If you can avoid that, things tend to work out okay. More than 90% of plan loans are repaid on time.

Greg Spears is HumbleDollar's��deputy editor.��Earlier in his career, he worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger���s Personal Finance magazine. After leaving journalism, Greg spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. He currently teaches behavioral economics at St. Joseph���s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. Greg is also a Certified Financial Planner certificate holder. Check out his earlier articles.

The post This Old House appeared first on HumbleDollar.

Traveling Money

I NEVER PLANNED to retire early. But I was toiling away in a job that had nothing to do with my college degrees or my previous work experience, plus it paid 40% less than the post I���d held for the prior 10 years. When my employer offered a meager early retirement package in 2020 to cut labor costs during the pandemic, I took it.

I���ve lived frugally ever since, as I had during the four years in my last, lower-paying job. My plan: Use money from a relatively small IRA for special expenditures, such as a big annual vacation.

In 2021, I withdrew some money from the IRA for a memorable trip touring some amazing national parks in California and visiting the awesome Big Sur coast. But this year���s planned two-week road trip to historic sites hit a snag: My IRA balance had been sharply trimmed by 2022���s stock market���s slide.

It didn���t feel right to sell investments for less than they���d been worth six months earlier, so I wasn���t sure how to pay for the trip. But I also didn���t want to cancel. My goal is to undertake bigger trips before I���m too old to walk and hike.

My son suggested getting a no-interest credit card, charging the cost of the trip and hoping the market turns around in time to pay it off. Initially, that sounded like a gamble. Since retiring, I���ve had just one general use credit card, and I always pay enough each month to get the balance paid off before the 3.99% introductory rate expires.

Still, I took my son���s advice and found a card with a 0% introductory rate. After thinking about it, I figured I���d have no problem paying it off before the teaser rate expires, even if my IRA fails to make big gains in the months ahead.

As I expected, signing up for a new card put me on a list to get more credit offers. The flurry of invitations included one containing an actual check for $6,524, which I could pay off in 42 ���affordable��� monthly payments of $218. The ���special offer��� is for back-to-school expenses, according to the letter. As I finished a master���s degree eight years ago, and my children are way beyond college and grad school, I don���t know anyone who���s going back to school.

The offer reminds me of how easily people can sink into debt from which they never recover. The ���preapproved��� check has an interest rate of 19.99%. If I cashed it for any reason, I would need to pay back $9,156, or $2,632 more than the sum borrowed. In these days of record inflation, how many people might feel the need to cash that check to pay for necessities, or perhaps be tempted to splurge on vacations or new furniture?

I���ve never been ruined by credit card debt, though there were times I got close. Much of the debt I amassed was for medical expenses for a family of four, including new glasses and contacts, visits to dentists and orthodontists, and regular doctor visits and prescriptions. I���d also charged unexpected car repairs. Yet no matter how many credit cards I had in my wallet, offers for new cards never stopped arriving.

Finance companies shouldn���t be allowed to send preapproved checks. Unlike applying for a credit card, it���s so easy to simply take the check and spend it. Who needs more than $6,000 for back-to-school expenses anyway? Besides, if you���re going back to college, you can get a much better loan rate than 19.99%.

The post Traveling Money appeared first on HumbleDollar.