Jonathan Clements's Blog, page 192

Inflicting Pain

FEDERAL RESERVE CHAIR Jerome Powell, speaking last Friday at the Jackson Hole Economic Symposium, said that bringing down inflation will mean ���some pain��� for households. But what sort of pain are we talking about?

Powell and the rest of the Fed members are hoping to create ���tight conditions.��� That isn���t some opaque description of the economy and financial markets. Instead, the term has four specific components that help dictate Fed policy.

The U.S. dollar. A stronger greenback slows economic growth by making domestic goods more expensive for foreign buyers. Net exports, a factor in determining GDP, often drop when the dollar rises. With the dollar near 20-year highs, the currency market is working in the Fed���s favor.
Corporate bond yields. When interest rates climb, corporate borrowing and investment slow. The Fed won���t be thrilled by what���s happening here. The spread between high-yield ���junk��� bonds and Treasury bonds, after easing during the summer, is now widening once again. But the spread between higher-quality corporate bonds and Treasurys remains modest by historical standards.
Stock market performance. This component is as basic as it sounds. Lower stock prices sometimes lead to reduced consumer spending, because folks feel less flush���what���s called a ���wealth effect.��� The upshot: For now, the Fed might want to see the bear market continue.
Interest rates. For consumers, higher borrowing rates stifle spending, including spending on home purchases. Look no further than the state of the real estate market, where sales seem to be slowing sharply amid plunging housing affordability. As of last week, the average rate on a 30-year conventional mortgage was 5.73%.

We can think of the current period as a hangover from 2021���s binge of stimulus and speculation. Today���s high inflation is the price we���re all paying, and the Fed is hell-bent on taming it. The good news: Expected inflation is at its lowest level since January. Investors and traders are pricing in much softer inflation readings for the next five years. But getting to those lower inflation rates will likely require some pain.

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Dunned Differently

EXCHANGE-TRADED funds are popular, but their complex structure makes them difficult to understand. A question I hear frequently: Are exchange-traded funds (ETFs)��more tax-efficient than traditional mutual funds?

The evidence suggests they are. One��recent study found that ETFs distribute capital gains to shareholders much less frequently than traditional mutual funds and,��when they do, those gains are smaller. It���s worth understanding why that���s the case.

Let���s first look at the mechanics of a traditional mutual fund. For simplicity, assume there are just two investors���Smith and Jones���in a hypothetical mutual fund. Also assume that the fund itself owns just one investment: stock in ABC company. The fund purchased these shares several years ago and has a significant unrealized gain on the stock.

Now, suppose Jones wants to redeem his investment in the fund. To meet this request, the fund manager will need cash. Where will it come from? The manager will have to sell some of the fund���s ABC shares. The fund can then send Jones a check to meet his redemption request.

As a result of the ABC sale, the fund will realize a profit. Because mutual funds are collective enterprises, that profit must be shared pro-rata among the fund���s shareholders. That will happen the next time it makes a capital gains distribution.

Unfortunately for Smith, those distributions typically occur only once a year, near the end of the year. By then, Jones will be long gone. Result: Smith alone will bear the tax impact caused by Jones���s earlier decision to redeem his investment. Keep in mind that, while Jones will sidestep the fund���s taxable distribution, he may also face taxes���but his tax bill would result from selling his fund shares for more than he paid.

The above example is greatly simplified. In an actual fund, there would be thousands, if not millions, of shareholders. Because of that, the decision by any one shareholder to redeem his or her investment would likely have scant impact on other shareholders. Still, when it comes to traditional mutual funds, there are no guarantees: You���re always taking a chance tax-wise.

Now, let���s look at how this same situation would work out if Smith and Jones were instead shareholders in an ETF. In this case, if Jones wanted to redeem his investment, he would follow an entirely different process. Rather than asking the mutual fund company to redeem his shares, as in the above example, he would instead sell his ETF shares to someone else.

How would that work? As indicated by their name, exchange-traded funds are bought and sold on stock exchanges. Selling ETF shares looks exactly like selling shares of, say, Microsoft. If you wanted to sell them, you wouldn���t ask Microsoft to redeem them. Instead, you���d simply sell your shares to another investor via a stock exchange.

The way ETF shares are sold makes all the difference.��When Jones sells his ETF shares to another investor, it has no impact on the fund itself. Unlike in the above example, the ETF's��manager wouldn't need to sell��anything.��That means��there would be��no tax impact���for Smith, Jones or anyone else���just as there���s no impact on Microsoft when one investor sells his shares to another.

What happens if there���s no one who wants to buy an ETF investor���s shares? There are two answers to that. The first is that, theoretically, an investor like Jones might be stuck. It���s unlikely, but it���s possible. That���s one reason I recommend sticking with the largest and most actively traded ETFs.

The second answer: There is a process for redeeming ETF shares, even when there are no buyers. Institutions that have the status of authorized participants��(APs) can turn in a block of ETF shares and receive, in exchange, all of the fund's underlying holdings. In that way, ETF investors have an escape valve of sorts. Individual investors can���t directly redeem ETF shares like this, but APs are always monitoring exchanges. They���ll start buying up ETF shares when they see that demand from other buyers is weak.

When this process occurs, APs are redeemed ���in kind.��� They receive the underlying holdings of the fund, not cash. Result: Because none of the fund���s holdings need to be sold, no tax liability is generated. That is what makes ETFs inherently more tax-efficient than traditional funds.

This isn���t to say that ETFs��never��generate capital gains. Whenever there are changes to a market index, such as the S&P 500, all funds based on that index���including ETFs���must make corresponding changes. That can generate some unavoidable gains, though these changes are infrequent and usually minor.

Also, while they���re a minority in the ETF universe, some ETFs are actively managed. They���ll have a much higher level of portfolio turnover than index-based ETFs and thus generate more gains. That's why, just as I don't recommend actively managed mutual funds, I don't recommend active ETFs.

In these two situations, ETFs may not have an advantage over traditional funds. But they���re also no worse. Overall, because of their exchange-traded structure, ETFs are fundamentally more tax-efficient than traditional mutual funds.

Does this mean you should immediately sell any mutual funds you own and switch to ETFs? Definitely not. Before doing anything, I would weigh��three factors.

First, you���ll want to consider whether you have a gain on your mutual fund shares. If so, you wouldn���t want to reflexively sell.

Second, remember that ETFs��� tax advantage only matters in taxable accounts. If you hold a traditional mutual fund���or��virtually��any other investment���in a tax-deferred account, such as a 401(k) or IRA, you aren���t taxed each year when you receive capital gains distributions.

Finally, it���s worth remembering that mutual funds carry a structural benefit of their own. As I described above, ETFs��� tax advantage derives from the fact that they can be bought and sold on exchanges. It���s a quick and easy process. It���s not, however,��guaranteed. It requires that there be a buyer��for every seller.

Consider what happened on the afternoon of May 6, 2010. I certainly won���t forget that day. I was at my desk, placing trades, when the broker���s website slowed down. Then, out of the blue, the market went haywire. Among other things, the prices of many individual stocks dropped to just a penny a share. Many ETF prices also fell to irrationally low levels. Within 30 minutes or so, everything was back to normal. But if you had been trying to sell an ETF that day, it would have been a scary episode. By contrast, an investor trying to redeem shares in a traditional mutual fund would have been insulated from��the problem altogether.

That episode is now known as the flash crash. A blue-ribbon commission at the SEC later issued a detailed report��to help investors understand what had happened. The report deconstructed all the contributing factors. In the end, though, the precise cause doesn���t really matter. The most important thing is simply for investors to understand that something like this can happen.

Similar episodes have occurred since 2010. In August��2015, another flash crash affected the U.S. market. In May of this year, a flash crash hit��European��stocks. I believe investors should have confidence in ETFs. Still, no investment structure is perfect.

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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Why We Collect

IT SEEMS ONE IS NEVER��enough.��I���ve known folks who collect handbags, wine, Mark Twain first editions, pennies, vintage posters, Pez dispensers, old cars, British royal family memorabilia, antique furniture, lunch boxes, motorcycles, Beanie Babies, Portmeirion china and more.

Near where I live is the Barnes Foundation, which houses Albert Barnes���s art collection, with its 181 paintings by Pierre-Auguste Renoir. Doesn���t that seem a tad obsessive? Most of us, I suspect, would be content with just three or four Renoirs.

I thought that maybe millennials���the Ikea generation purportedly more interested in experiences than possessions���would be less inclined to become collectors. But after asking around, I���m not so sure. It seems baseball cards are still a thing and, perhaps more surprising, so too are Pokemon cards.

Why do we collect? All kinds of explanations have been offered. Perhaps a collection is a way to signal our worthiness as a mate by proving our ability to amass resources. Maybe it���s a way to show our loyalty or to bring some order to our otherwise chaotic lives. Perhaps it reflects a craving for immortality because our collection might live on even after we shuffle off this mortal coil.

Sigmund Freud, apparently, thought the urge to collect was triggered by the trauma of improper toilet training.��Based on all the collecting that���s going on, it seems improper toilet training is rampant.

Frankly, I don���t see much wrong with collecting, as long as it doesn���t turn into hoarding and it doesn���t break the bank. For collectors, there���s obviously a thrill to the chase. But it's worth pondering how the chase will end.

As with almost everything, there are diminishing returns. I own four paintings by Robert Kipniss. I used to live in an apartment next to his studio, and we���d occasionally chat in the hallway and the building���s gym, so his work has added meaning for me. Still, would a fifth painting bring the same thrill as the first four? Almost certainly not.

When I was a teenager, I used to collect stamps, a hobby I shared with my grandfather, whom everybody called Clem. When Clem died 34 years ago, I inherited his stamp collection, which I���ve been lugging around ever since and which today fills two cardboard boxes in my basement. I doubt I���d get much if I tried to sell the collection and, in any case, it feels wrong to let that piece of him go. On the other hand, if I don���t deal with the stamp collection, I'll be bequeathing that burden to my kids.

As I see it, we���re all part of a conversation that began long before we were born and will continue long after we���re gone. We���re influenced by the past and, in some small way, we���ll influence the future. That���s why it���s so important to be thoughtful about our words and our actions.

And perhaps also our stuff���because at least some of it will outlive us.

For earlier generations, wealth was measured in things: silver cutlery, bone china, fine furniture and, of course, land and houses. But today, much of the world���s wealth consists of stocks and bonds. More recently, we���ve seen a move to ascribe value to digital assets like cryptocurrencies and nonfungible tokens. I���m no fan of bitcoin and NFTs, but it���s a sign of where the world���s headed. There's less interest in things, at least as a store of wealth.

That doesn���t mean folks shouldn���t collect stamps, coins and antiques. But it���s worth asking, will my heirs want what I���m buying today? No, not every purchase we make should include a consideration of future generations. But it���s another way of forcing ourselves to consider whether this is something that will have lasting appeal���not just to others, but also to ourselves.

I think I���ll continue to enjoy my Kipniss paintings, even as I continue to fret over Clem���s stamp collection. What about the other stuff I���ve picked up along the way? A few items continue to hold meaning. But mostly, I see great virtue in having less.

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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Liquidating Assets

HERE I SIT IN MY local Starbucks, sipping an overpriced iced tea comprised of 50% ice. As I am prone to do, I���m observing the customers in line and what they���re ordering. Yeah, I���m that suspicious-looking old man in the corner with iPhone in hand.

What I observe is a line of young, really young people���like less than age 25. What I see is consistent with many other stores where I���ve loitered, that is, lingered.

I anecdotally conclude that a younger demographic is Starbucks���s target. In fact, 49% of Starbucks���s revenue comes from 25- to 40-year-olds, while 18- to 24-year-olds account for another 40%. Starbucks considers its core customer to have an average income of $90,000. I���m not so sure. Neither the average nor the median income for Americans under age 45 is anywhere near that.

I���m pretty sure a big chunk of Starbucks���s customers can���t afford what they spend on their drinks. Yeah, I said it, can���t afford. But, of course, they buy them anyway. They just don���t realize what they can���t afford. Maybe I should give them a break. After all, the under-25 crowd���s brains aren���t fully developed.

How people spend their money fascinates me, especially when I hear that 42% of Americans are struggling financially, that many can���t afford their prescription copays and that they���re unable to save for the future. The average American household spends some 18% of its net income on things like pets, hotels, eating out, equipment for their hobbies, and entertainment fees and admissions.

I���m convinced���using my fully developed and hopefully still sound brain���that at least 80% of households could have a better financial future if they changed their spending habits. In your 20s, it���s easy to conclude that $5 for a drink is affordable, but viewing spending and saving over a lifetime presents a different possibility. Problem is, who thinks that way in their 20s?

The most popular Starbucks drink seems to be the iced caramel macchiato, which on average costs $3.75 to $4.95. Just 80 or so of those Venti-sized drinks would allow the 40% of Americans who can���t come up with $400 to get back in the game. Imagine that: Forgoing the caramel macchiato may be the answer to a financially secure retirement.

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Best Advice Ever

I’M EMBARRASSED to admit that the best piece of financial advice I’ve ever received is also the only piece of financial advice I’ve ever received. To make matters worse, the advice came from someone who stood to profit from the guidance he was providing.

As a child, I don’t remember a single family discussion about money. There were no dinner table talks about the stock market. There were no lectures about saving, spending or investing for college.

In high school, the only financial guidance I received was a lesson on how to figure out change from a cash purchase. That skill, along with showing I could correctly fill out a personal check, was supposed to ensure I was financially competent to enter adulthood.

In college, my personal finance horizons broadened. I discovered that financial aid offices were happy to hand out thousands of dollars to anyone willing to sign on the dotted line. But what about advice on the best strategies for using those funds? Such questions were met with silence.

When I entered the workforce and got married, I still didn’t have a financial mentor. My then-husband had no desire to be involved in decisions about money. It was up to me to pay the bills, manage the budget and file the taxes.

For four decades, I taught myself—through trial and error—everything I needed to know about money. I didn’t ask for advice because I didn’t know who to ask. My personality—I’m generally suspicious of people offering me their opinions—meant that, in any case, I probably wouldn’t have acted on the advice I received.

Late last year, it became apparent that my dream of retiring at age 55 was going to materialize. I was confident that my husband and I had the financial wherewithal to live comfortably without my salary.

As part of our retirement plan, we decided we’d sell our house in Oregon and move to our home in Arizona. Since I wasn’t eligible to retire until May 2022, I assumed we’d relocate in early June. The plan was to sell our Oregon home after we’d settled in Arizona.

In January, my husband encouraged me to contact our real estate agent. I was reluctant. I felt it was too early in the process to bother the agent. I’d purchased four homes in my life and felt I had a good handle on the timeline we’d want to follow.

With my husband’s gentle prodding, I finally conceded. The agent was happy to give us his take on the real estate market. I was skeptical that anything he could say would change my mind about the plans I’d already formulated.

The agent’s advice was simple: Get your house on the market as quickly as possible. With no homes in our neighborhood currently for sale—and mortgage rates still hovering around 3%—he felt confident we’d have multiple buyers interested in our house.

He warned us that waiting until June would mean having to compete with a surge of other homes for sale. He believed that once mortgage rates rose above 4%, the number of buyers would decrease rapidly. He told us the current real estate market was unlike anything he’d seen before.

It would have been easy to dismiss our agent’s advice. He was, after all, going to make a generous commission from the sale of our home. But for once, I set aside my skepticism and decided to trust someone else’s opinion.

Taking his advice would mean our lives would be disrupted in unimaginable ways in the weeks before I retired. But I also realized that not taking his advice could mean losing out on the highest possible price for our home.

In the end, the advice we received was sound. Our home sold less than two days after going on the market. It closed for $125,000 above the asking price. We weren’t required to pay for any necessary repairs. We were able to stay in the home rent-free for several weeks.

Now, in hindsight, I appreciate the advice even more. The first and only piece of financial advice I’ve ever received—and ever taken—could hardly have been better. By June 2022, housing prices were cooling off at the fastest pace on record. As I’ve watched the sales trends in our old neighborhood from afar, it seems likely that we sold at the market peak.

Kristine Hayes Nibler recently retired, and she and her husband now live in Arizona. She enjoys spending her time reading, writing and training their four dogs. Check out Kristine's earlier articles.

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An Arm and a Hip

I'M THE PROUD OWNER of a shiny new, state-of-the-art left hip.




My new hip is made of super-strong titanium and cobalt chrome with a ceramic femoral ball. The doctors tell me that with proper care—alas, no more running—it should last me a good 25 years. 




The prosthetic was implanted in early June and already this modern medical miracle is changing my life for the better. It’s less than two months since the surgery and all the old arthritic pain that I’ve lived with for so long is gone.




I have a range of motion I haven’t had for years. I can bend, I can kneel, I can walk the dog without limping or hurting, I can sit in a lotus position while meditating. Other than some stiffness when I get up from sleeping or sitting, most of the time I forget the new hip is even in there. Amazing, just amazing.




Now, all I need to do is pay for it.




Including the prosthetic, surgeon’s fees, hospital services, anesthesia, imaging and various other incidentals, the whole elective surgery cost upward of $50,000, according to the explanation of benefits statements I’ve received in the mail. It’s an astronomical amount of money, and all I can say is: thank heaven for medical insurance. 




When I made an early exit from the corporate world late last year to pursue a second act as an author, I stayed on my former employer’s insurance plan by opting for COBRA coverage. The premiums aren’t cheap. I pay about $650 a month, but it’s a good plan. Between deductibles and out-of-pocket costs, my total financial responsibility for the hip replacement is about $5,000.




It’s not easy for anyone, let alone an early retiree living on savings, to come up with $5,000 for elective surgery. Fortunately, I have other tools in my toolbox to help with these expenses—in the form of two health savings accounts (HSAs) that I carried over from old employers. 




While I was working, I purposely overfunded these HSA accounts as part of my “gaining my freedom” strategy. I knew I wanted to step out of the workforce at age 62 so I could do something different while I was still young enough.




Given that I wouldn’t be eligible for Medicare until 65, I wanted enough money socked away to pay any out-of-pocket medical expenses I might incur during the intervening three years. After all, life has a way of tossing curveballs our way, especially health issues, so I wanted to be as financially prepared as possible. 






Enter the HSAs. The benefit of an HSA, of course, is that it’s built from tax-deductible dollars. The extra money I threw into those accounts each month not only reduced my taxes but also gave me a future buffer of funds that I could spend tax-free on eligible medical expenses.




Overall, I was able to put away a total of about $15,000 across the two HSAs. I figured that would allow me to cover an average of $5,000 a year in medical expenses over the three bridge years until I could go on Medicare.




With the hip replacement, I will be spending a bit more than $5,000 in this first year of freedom. But at least I know that I’ve maxed out my deductibles and out-of-pocket expenses on my medical plan this year. Any additional medical-related needs through the rest of 2022 will be covered 100% by insurance. I plan to take advantage of that by scheduling a needed routine colonoscopy at the end of this year.




On Jan. 1, 2023, the reset button gets pushed and I will be back to square one on deductibles and out-of-pocket costs. With my 18-month COBRA benefit running out in March, I’ll also need to find a new insurance plan next year. I plan to do that during the open enrollment period this fall. With my limited consulting income this year, I hope to qualify for reduced-cost health care coverage through the health care exchange.




Either way, I have about $10,000 in remaining HSA funds to cover at least a fair chunk of my medical expenses until I can go on Medicare at the end of 2024. Nothing wreaks greater havoc on a sound retirement plan than unforeseen medical bills. For me, my HSAs are a key part of weathering the storm, and I’m grateful I have them.




Now, I’m off to do a hike.

James Kerr led global communications, public relations and social media for a number of Fortune 500 technology firms before leaving the corporate world to pursue his passion for writing and storytelling. His debut book, “The Long Walk Home: How I Lost My Job as a Corporate Remora Fish and Rediscovered My Life’s Purpose,” was published in 2022 by Blydyn Square Books. Jim blogs at PeaceableMan.com. Follow him on Twitter @JamesBKerr and check out his previous articles.

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The Magic Number

WHEN SHOULD YOU start drawing Social Security? If folks want to maximize their lifetime benefit, I think the answer is fairly straightforward.

Maximizing lifetime Social Security income isn’t always the goal, of course. Some people need Social Security to meet basic needs. These people usually claim benefits as soon as they reach age 62, the earliest possible age.

Others view Social Security as longevity insurance. They want as much monthly income as possible in the event they or their spouse live a long time. These people typically wait until 70, the latest possible age, to start Social Security.

But for many people, the goal is to maximize the amount they’re likely to receive during their lifetime. Financial nerds often toss around terms like “breakeven” or “cross-over.” More sophisticated analysts consider present values and appropriate discount rates. I like simple. Want to maximize lifetime income? I believe the decision rule is fairly simple.

If I am likely to die early in retirement, I should start Social Security as soon as possible. If I know I am going to die at age 65 and I don’t have a spouse who will receive survivor benefits, I had better start Social Security at 62. It makes no sense to wait.
On the other hand, if I am going to live a long time—perhaps to age 90 or even 100—I want the largest monthly check possible for all those years. I achieve that by waiting until 70 to start Social Security.
If I have no reason to think I will either die early or live a very long life, it makes sense to start Social Security sometime between age 62 and 70. One might choose age 66, the midpoint between 62 and 70. Others might choose their Social Security full retirement age. For those born between 1943 and 1954, full retirement age is 66. For those born between 1955 and 1959, it’s 66 and some months. For those born in 1960 or later, full retirement age is 67.

When I considered Social Security, my goal was to maximize my likely lifetime income. I might die early. Although I have no significant health issues, I am overweight and, unlike Dennis Friedman, I do not exercise regularly.

On the other hand, I might live a very long time. I do have some good genes. My grandmother lived to nearly 112 and my mother is still doing well at 95. I have never smoked and I drink only occasionally.

My decision? My full retirement age was 66. I also liked the idea that 66 was the midpoint between 62 and 70. Although I had retired a few years earlier, I chose to start drawing Social Security at 66.

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Think of the Children

WE PUT OUR TWO KIDS through college using 529 plans���and I estimate the accounts easily added 10% to the value of our college savings, compared to what we would have accumulated if we���d invested through a regular taxable account. Yet only 37% of families use 529s to help pay for college, according to a 2021 survey by Sallie Mae.

Like an IRA, a 529 plan gives you a tax break for saving for a specific goal���but, in this case, college rather than retirement. Money in a 529 grows tax-deferred and, if used to pay for qualifying education expenses, can be withdrawn tax-free.

You don���t get a federal tax deduction for funding a 529, like you can with a traditional IRA or 401(k). Several states, however, do give a state income-tax deduction, including Pennsylvania, where we live. Pennsylvania���s state income-tax rate is 3.07%.

Each year, Pennsylvania allows residents to deduct up to the gift-tax exclusion���$16,000 in 2022���for contributions to any 529 plan in the country. Other states provide a deduction for in-state plans only, which limits your choice. At the end of this article, I���ll offer some suggestions for finding a good plan.

We used Utah���s 529 plan because it had rock-bottom fees, offered low-cost index funds and didn���t charge a sales commission. We invested in lifecycle funds that started stock-heavy when the kids were young, then switched to a majority bond allocation as college neared.

When we took withdrawals, we owed no federal or state taxes because all the money was spent on qualifying education expenses. If you���re keeping score, this means 529 plans potentially offer a rare tax triple play: tax-deductible contributions at the state level, tax-deferred growth and tax-free withdrawals.

This tax trifecta is shared with only one other investment account that I know of���health savings accounts. HSAs are a bit more valuable, however, as they confer a federal income-tax deduction on contributions, rather than solely a state income-tax deduction, which is what we got for our 529 contributions.

Qualifying education expenses include the basics���tuition, room and board. They also include anything required by the school, such as books, equipment and fees. I imagine a personal computer is required equipment for today���s college students. A dorm room fridge or a puffy jacket, however, wouldn���t make the grade.

There was one more way that we saved thanks to 529 plans. For a decade, my wife and I carried credit cards that paid a cash reward to our kids��� 529 accounts. The Upromise card���s reward equaled 1.5% of each month���s credit card charges. We paid off the card���s balance in full each month and transferred the reward dollars to our kids��� 529s. Over a decade, the card���s reward payments added more than $3,000 to our family���s 529 account balances.

Even with our 529 savings, paying for college was a long, hard slog. We paid tuition for eight straight years. Our kids graduated without any debt. They now have good careers and lead happy, independent lives. To us, that���s the whole purpose of education.

If you���re saving for college, shop carefully for your 529 plan. Morningstar ranks the plans once a year, awarding them gold, silver and bronze medals. The Utah 529 plan we used still gets a gold medal, one of only three that Morningstar bestowed in 2021. Check to see if one of the prize-winning plans is offered in your state.

Meanwhile, you can research your state���s 529 tax breaks using SavingforCollege.com. We were lucky with Pennsylvania���s 529 rules. Many states are less generous. If your state���s plans don���t seem like a good fit and there���s no special state tax break for funding them, don���t force it. Instead, check out the plans from other states.

If you decide to open a 529 account, try to stick with a direct-sold plan. These are analogous to no-load mutual funds. The 529 plans sold by brokers tend to be more like load funds and charge higher costs.

Some people have told me they���ve held off saving in 529s in the belief it might hurt their child���s chance for a scholarship. Perhaps, but I don���t think this is a big risk. Money in a 529 account opened by a parent isn���t heavily weighted in the college aid formulas.

If your child does get a full ride to college, you can transfer money in a 529 account to another family member. You could even spend the money by going back to school yourself. New rules also make money in a 529 available to pay for K-12 education or to repay up to $10,000 in student loan debt.

If you don���t use your savings for eligible expenses like these, and instead make withdrawals for some other purpose, you���ll owe a 10% tax penalty and income taxes on the account���s investment gains, but not on your original contributions. If you���re worried about overdoing it, you might limit your 529 savings to perhaps half of what you expect your child���s college education to cost.

Of course, you may not need to save in a 529 if your child can run a four-minute mile or is a lock to be admitted to a national military academy. As for the rest of us, I suggest starting to save as early as possible. After all, as almost everybody will tell you, kids grow up fast.

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.

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Separate Ways

IT���S CLEAR I AM a dinosaur when it comes to my views on money matters���and apparently several other things as well, but let���s not go there.

When I read in blog posts and articles that a married couple should separate their finances into his money and her money, that one person pays for this and the other for that, and never the twain shall meet, I���m shocked. Some articles indicate a severe division of money matters. No joint bank accounts. One person saves diligently for retirement. The other is a non-saving spendthrift.

I read an advice column where a woman wanted to know what she should do because her husband had been wasting money, was behind on his credit card payments and couldn���t pay his share of the mortgage. His share, her share? Can this approach work for long? I say to myself, ���Is this really a marriage?���

But, of course, my frame of reference is that of someone born between the Greatest Generation and the baby boomers. Nevertheless, such a divided view of money doesn't strike me as healthy.

During our marriage of nearly 54 years, our income���with minor exceptions���has been what I earned. Even in retirement, our income is my pension, my Social Security, my wife's Social Security based on my earnings record, and her tiny pension based on employment that ended in 1970.

Still, never during those 54 years was any of our money considered mine. Never was there separate anything when it came to money. All our bank accounts are joint. All our investments, except our IRAs, are joint holdings. Stock in my previous employer, which I obtained through stock options and bonus awards, was converted to joint ownership.

Several years ago, my wife inherited a few thousand dollars from an aunt. There is an emotional attachment to that inheritance. We agreed that we would isolate that money in a separate savings account for my wife to use as she saw fit. The money is still there���and, while we���ve agreed it���s my wife���s money, it still sits in a joint account.

When it comes to spending, anything significant is a joint decision. Actually, some rather insignificant spending is also discussed. There are some exceptions. My wife���s visits to Talbots, the salon and the makeup counter are exempt, and wisely so.

I struggle to understand why other couples handle their money differently. What are the issues that drive their thinking about ownership and use of money? Is it power, control, selfishness, lack of trust or simply a generational difference? I suspect it varies by couple and may be a combination of factors. But whatever it is, I don���t get it.

The post Separate Ways appeared first on HumbleDollar.

Tips for Safe Travel

TRAVELING TO and living in foreign countries has been a big part of my adult life. My wife and I are looking forward to even more travel now that we���re no longer working. In fact, we just spent three months in Europe. It���s our second such trip since retiring late last year.

Over the decades, we���ve given a fair amount of thought to how we can stay safe during our travels. Below are 10 suggestions for those venturing beyond our borders. Many of these tips also apply if you���re traveling within the U.S.

1. Safeguard your passport. Sure, this is common sense. But it���s first on the list for a reason. Take it seriously. There are different places to secure your passport���hotel safe, double closure pocket, hidden travel wallet.

Make a photocopy or take a picture of the personal information page with your phone, and keep your actual passport safely tucked away. Many times, when folks ask for your passport, all they really need is the info that���s on it.

But have no doubt: The airline taking you home wants the real thing. Replacing credit cards or a driver���s license would be a hassle. But those pale in comparison with trying to get home without a passport or replacing it while overseas.

2. Separate your credit cards. Replacing credit cards outside your home country isn���t as simple as getting new ones in the mail. If you have more than one���and you should if you travel���keep them separate so they aren���t all lost or stolen at once. For example, my wife and I travel with two joint credit cards. I carry card A in my wallet, and card B is with my passport. My wife carries her card B, and her card A is with her passport. Of course, both A and B have no foreign transaction fees.

When we want to pay for something, one of us pulls out whichever card we want to use. If one of our wallets is lost or stolen, only one account is compromised, and we can use the other. There���s also a card C, which is our main one and waits for us at home. That account is safe even if all our stuff is stolen. Extra tip: Have apps for your cards set up on your phone so you can easily lock the account as soon as you know your card is missing, no matter what time it is at home.

3. Separate your IDs. If some piece of identification gets stolen despite your best efforts, it���s good to have a backup. You should always carry identification, but that doesn���t have to be your passport. You might keep a driver���s license in your wallet and secure your passport somewhere else. I take my retired military identification with me overseas, along with my Global Entry card, but I don���t keep all these together.

4. Get a travel wallet. It might be anywhere on your body, but the key is that it���s hard to see and hard to pick if it is seen. I suggest using it for important items and then continuing to carry a normal wallet so you can pay for stuff or produce ID without revealing you have another wallet hidden. My regular wallet has my driver���s license, a single credit card, a debit card, a health insurance card and some cash.

I don���t always use my hidden travel wallet, but it���s nice to have. I���ve used it when I���m forced to carry a lot of cash, or when I know I���ll need to produce my physical passport but don���t want it in my open pocket all day. I also use it on travel days when passing through high pickpocket areas, such as a train station.

5. Identify your bags. Make sure your suitcase, backpack or purse has your contact details inside. Also, put something on it that makes it quickly and easily identifiable as yours. A distinctive ribbon or piece of tape also helps owners of similar-looking bags realize it���s not theirs.

We���ve never used Apple AirTags, but I���ve read that these and similar coin-sized devices were the only reason lots of travelers got their lost luggage back this summer. They���re small and cheap enough that we���re going to consider using them not only for luggage, but also for our wallets and keys. It���s not unheard of for a thief to remove cash and toss the wallet or purse in the trash. It would be nice to at least get the other stuff back.

6. Pack mindfully. In some situations, you may not be able to keep control of your bags in the way you���d want. Several times in the last few months, we���ve had to stow luggage under a bus. Other people were getting off and taking luggage���out of our sight���while we remained on board. We���ve also had to stow bags on a rack two train cars down from our seats, as well as in other less-than-optimal situations. Make sure that, when you pack, your most important items are in a backpack or purse that���s always under your direct control.

7. Consider hiding valuables. Put things you care about deeper in your backpack, not in the most convenient outer pocket. If you lock belongings in a car trunk, consider putting your most valuable items in an innocuous plastic bag. A thief who breaks in will most likely grab your luggage���but not every little thing in the trunk.

Not everywhere you stay is going to have a safe, so consider hiding things you care about elsewhere in your room. I���m one of those people who might forget he did this until he���s 50 miles away, so I���d have to be pretty concerned to take that extra step. Hello travel wallet.

8. Secure your communications. Continue to observe good internet safety practices. Recognize this may be harder when you���re away from home. Just because your hotel wi-fi requires a password doesn���t mean it���s secure. If your phone comes with a personal hotspot, you can use it to generate a more secure internet connection for your computer.

Speaking of phones, add a PIN code to your SIM card. It���s not inconvenient to you, as the device will generally only ask for it when it���s completely powered off and back on. It will, however, prevent a thief who steals your phone from using your SIM card. If you���re traveling with a computer, secure it with a password, too.

9. Carry some cash. Sometimes, there���s no substitute. On those occasions, it may not matter much what currency it is. U.S. dollars always seem to work in a pinch. Don���t keep all your cash in the same place. (I was going to make a joke about carrying traveler���s checks, but I just learned those are still around, though far less used these days and probably not a good option for most people.)

10. Observe good personal safety practices. Be alert, no matter where you are. Some areas will be more prone to criminal activity, but���as a foreigner���you may not realize you���ve stumbled into a riskier part of town.

Looking for further suggestions? The FBI has published tips for business travelers and students.

Michael Perry is a former career Army��officer and external��affairs executive��for a Fortune 100��company. In addition to personal finance and investing, his interests include reading, traveling,��being outdoors,��strength training and coaching, and cocktails. Check out his earlier articles.

The post Tips for Safe Travel appeared first on HumbleDollar.