Jonathan Clements's Blog, page 195

Brain Teasers

I CAN���T CALL THE BOOKS I buy ���beach reads��� because, honestly, they can get dense. Still, if���like me���you enjoy learning about investing, economics or even the religious overtones of capitalism, here are five books that might make for insightful summer reading or, perhaps, induce napping in the hammock.

The Physics of Wall Street by James Owen Weatherall. This book begins with the assertion that ���Warren Buffett isn���t the best money manager in the world��� and then spends the next 224 pages introducing us to genius PhDs who���ve whipped the S&P 500 by anticipating the prices of securities.

Doyne Farmer was working on chaos theory at Los Alamos National Laboratory when he realized his understanding of complex systems could be applied to options. With a stake from a Swiss bank, he opens his confidently named Prediction Company. ���Over the firm���s first fifteen years, its risk-adjusted return was almost one hundred times larger than the S&P 500 return over the same period,��� Weatherall writes.

This book explains why so many physicists have quit academia for huge-paying jobs at hedge funds. Using black-box programs, high-speed trading and scientific breakthroughs hardly anyone else understands, they arbitrage securities in complex trading strategies. When it works, they make billions. When it fails, it sometimes takes a government bailout to prevent widespread economic collapse.

Lights Out: Pride, Delusion, and the Fall of General Electric by Thomas Gryta and Ted Mann. GE went from having the largest stock market value in the world to struggling to make payroll in less than 10 years. In Act One, star CEO Jack Welch massages quarterly earnings so perfectly that GE���s stock rises 40-fold between 1980 and 2000.

In Act Two, Welch���s successor Jeffrey Immelt steers a deflating balloon. He tries to spin the industrial giant as a digital company still worthy of a lofty stock multiple. The Great Recession of 2008 pulls the curtain back on that fiction, with GE Capital requiring a $139 billion government bailout. At the same time, demand stopped for GE���s heavy-industry mainstays: locomotives, CT scanners, jet engines and power turbines.

Act Three, still underway, is the biggest yard sale of all time. The company is selling off everything it can to live another day. Its latest plan���not covered in the book���is to split into three separate companies. GE will slim down to a single division���the aircraft engine manufacturer. All companies have a lifespan. This is what happens when the biggest one enters the nursing home.

The Economists��� Hour by Binyamin Appelbaum. As presidents realize their job renewal depends on delivering prosperity, economic professors are summoned from Chicago or Cambridge to try out their pet theories, often to startling effect.

The biggest trend, championed by the late Milton Friedman of the University of Chicago, was to replace government regulation with free markets. The dollar is taken off the gold standard and allowed to float. Millions more people can afford to fly nowadays because the price of airline tickets was deregulated.

In a lesser-known episode, a blind economist from the University of Rochester, Walter Oi, helps persuade Richard Nixon to end the draft. Oi, accompanied to the Oval Office by his guide dog, argues the draft wastefully interferes with young men���s career choices���at a cost to the economy of $5 billion a year. He recommends raising soldiers��� pay so the Army can compete for volunteers in the job market.

At a hearing, U.S. Army General William Westmoreland objected, saying, ���I do not relish the prospect of commanding an army of mercenaries.��� Milton Friedman fired right back: ���General, would you rather command an army of slaves?���

Religion and the Rise of Capitalism by Benjamin M. Friedman. The former chair of Harvard���s economics department has written a theological tome showing how religious belief, and Protestantism in particular, is woven through American capitalism.

Under John Calvin���s strict interpretation, who gets into heaven is predestined from birth. No amount of good work can change it. So how might a pious Puritan in Massachusetts signal that he���s in God���s good graces? Simple: Work hard and get wealthy. Over time, Calvin���s cheerless faith has faded. But personal traits like diligence and thrift became secularized, lending a powerful force to capitalism.

Friedman traces the development of Christian thought, and its influence on economic belief, through to the end of the 20th century. A surprising recurring theme is a belief in millennialism���that the end is near. Like Charlie Brown and the football, these end-timers always seem doomed to disappointment.

Bad Blood: Secrets and Lies in a Silicon Valley Startup by John Carreyrou. This is the story of the Theranos blood testing company told by the reporter who revealed���on the front page of The Wall Street Journal���that its machines didn���t work. The company soon collapsed, and its two cofounders were convicted of fraud.

How did a Potemkin company get so large? Credit Silicon Valley mythmaking���plus iron-clad nondisclosure agreements. CEO Elizabeth Holmes dropped out of Stanford University and modeled herself after Steve Jobs. Her mesmerizing speeches of a world transformed by health technology fooled even Henry Kissinger and George Schultz, two former secretaries of state who served on the board.

Anyone who had a contrary view of the company came under heavy legal attack. Schultz���s grandson, Tyler, working a summer internship at the company, realized something was rotten. But when he told his grandfather about the problems, they became estranged. Holmes attended Schultz���s 95th birthday party. Tyler wasn���t invited.

Theranos���s largest individual investor at $125 million was Rupert Murdoch, whose News Corporation owns The Wall Street Journal. Four times Holmes asked Murdoch to muzzle the reporter who pulled down the whole rotten fa��ade. Murdoch told Holmes he had trust in the paper���s editors���and lost his investment.

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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Moaning About Money

I'M SPENDING MONEY like water, even though I���m a tightwad, or so says my wife.

We���re on vacation���well, sort of. Since we���re retirees, ���vacation��� has less meaning. Still, we are away from our principal residence in New Jersey, instead spending the summer at our house on Cape Cod.

At various points, some of our four children and 13 grandchildren arrive���but, fortunately, not all at once. The house goes from quiet to pandemonium. Even so, it���s a bit depressing when they all leave and it���s quiet again.

Over the years, we���ve developed traditions, stuff we have to do. Mini golf���now $14 a person. The beach���parking sticker $35 a season. Go-carting, bumper boats, baseball batting cage���each $9 a try. Craft shows���highly variable. Golf���$97 for two. And, of course, feeding them all, plus a few dinners out for the gang. This week, we spent $400 on dinner out for eight.

My wife just told me I need to make another trip to the ATM���$3.50 fee. My moan caused her to say, ���I know you���re stressed, but it���s our vacation.��� My moan wasn���t serious, though. I get it, and I also get how fortunate we are to be able to do what we do and to have family around.

A few weeks ago, my stress was more authentic, as I watched our investments drop. But lately, I���m on a high. One day recently, we were up $47,000. Another day, another $17,000. At the end of the month, tax-free interest payments will buy more shares of our mutual funds. Let the good times roll.

The thing is, we���re still nowhere near breakeven since March 1. Emotions have a powerful effect, especially when it comes to money. If things look good, I���m more inclined to spend. When they���re down, I tend to moan.

We have a hiatus at the moment. We���re down to one grandson staying with us. Tomorrow, another crew of four arrive. It will be back to the ATM. The supermarket limits cash back to $50 and my bank is nowhere in sight.

Can we please have a mini-bull market, at least until the end of August? I fear my wife���s reaction to another moan.

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What to Worry About

BOSTON COLLEGE'S Center for Retirement Research just published a study that explores what Americans think are the biggest risks to their retirement���as opposed to what they objectively are. The center found ���a big disconnect between how actual and perceived risks are ranked.��� That disconnect could be hurting people���s retirement planning.

The study says the biggest risk to retirement is longevity���living so long that we run out of money. But the survey found that the biggest perceived threat is a market drop that cuts into savings, which the study says is���objectively speaking���only the third biggest risk.

The study���s author, Wenliang Hou, is a quantitative analyst at Fidelity Investments and a former research analyst at the Center for Retirement Research. In order of importance, these are the five biggest retirement risks, according to his study:

Longevity. This is the risk that we live longer than planned and run out of savings.
Health. This might be the need for long-term care or perhaps a serious health issue that leads to hefty medical costs.
Markets. A stock market decline could devour the assets we were counting on to fund our retirement. Alternatively, our plans might be derailed by a large drop in home prices.
Family. Risks include the death of a spouse, a child���s financial or health problems, aging parents that need care or any other family issue that affects our retirement finances.
Policy. Such risks include changes to Social Security and Medicare that reduce benefits, or a pension plan that cuts its payments.

To evaluate the relative importance of each risk, Hou calculated the wealth required to enjoy a successful retirement, assuming objective levels of risk for each of the five categories. He then removed the various risks from his analysis one at a time. Each risk was ranked based on how much less initial retirement wealth a retiree would need if a given risk was eliminated.

Meanwhile, to gauge people���s subjective assessment of retirement risks, Hou used the University of Michigan���s Health and Retirement Study (HRS). The study is a ���longitudinal panel study that surveys a representative sample of approximately 20,000 people in America.��� It���s a treasure trove of data on retirees that goes back to 1992.

Consider longevity risk. Using Social Security data, Hou found that the chance of a 65-year-old man living to age 80 was 66%. But the HRS survey indicated that just 58% of those surveyed expected a man to live that long.

If we downplay the risk of longevity, we might not save enough for our later retirement years. What to do? We���d be better prepared for a long retirement if we devoted more time and effort to increasing our guaranteed lifetime income. This might be accomplished by delaying Social Security, choosing a job that has a pension or purchasing an income��annuity.

Hou���s analysis also found that a second risk people generally underestimate is the chance of a health setback and the need for long-term care. He found that people���s subjective estimate for their medical spending over the next year barely changes as they age���even among Americans who are 80 and older.

One risk that people can probably cross off their worry list is the chance of a policy change hurting their retirement. For married couples, Hou measured the objective chance of a policy change upsetting their retirement success at 0.1%. Why so small? Based on past changes, Social Security reform is unlikely to have a significant impact on those already retired. By contrast, for a married couple, the objective chance of outliving their savings was calculated to be 33.4%.

Of course, analyses like this one are based on averages, so the risk assessments may not be precisely right for you or me. Still, they do provide broad guidance. In my engineering career, I would always subject an analysis like this to a ���sanity check��� for reasonableness. This study passes that test for me.

In my many discussions with current and future retirees, I find longevity risk is frequently underestimated. Waiting to claim Social Security, and thereby getting a larger benefit, is a smart way to address the risk of a long retirement. But the people I talk to seem to have a greater fear of dying early and ���leaving money on the table.��� If we delay benefits and then die early in retirement, we may shortchange ourselves when it comes to our Social Security benefit. This is the reasoning I frequently hear from folks who claim reduced benefits at age 62.

But that risk is nothing compared to the chance of outliving our money. I���ve lived that scenario with my parents. I also have friends who���ve had to help their parents financially in retirement. I���d much rather have income that���s guaranteed for life���and thereby reduce the risk of outliving my assets.

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.

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Going Strong

RECESSION FEARS are fading. Second-quarter corporate profits have been better than expected. Some recent economic data show key barometers in growth mode, even as the latest GDP report confirmed a second consecutive quarter of economic contraction. Indeed, this past Friday���s hot employment��report cooled the debate over whether we���re in a recession.

The pandemic upended so many facets of life and business, and we���re still feeling the effects today, as evidenced by odd swings in what are often stable economic numbers. For instance, business inventories and net exports are key components of GDP, and both contributed to the first half���s ���technical��� recession. Sharply lower government spending also hurt year-over-year growth during the first and second quarter.

But things look much better through the rest of the year. Even with the continued strong labor market, inflation is likely to simmer down. Gasoline prices have slipped every day since mid-June, which is when the stock market also bottomed. The UN's Food and Agriculture Organization reported last Friday that its food price index fell for a fourth straight month. We���ll get the official word on last month���s inflation in Wednesday���s CPI report. Analysts expect a 0.2% monthly rise, driven by wage gains and still-climbing home prices.

Economists are more jittery about growth in 2023. Bank of America expects a sluggish economy next year, while Goldman Sachs is closer to the consensus estimate, predicting a below-trend GDP growth rate.

Amid all this confusion and noise, stocks continue to stage a recovery that���s going on two months now. Market pundits go back and forth on whether June 17 was ���the bottom��� or just ���a low��� for the S&P 500. The 14% rebound since then comes as company earnings continue to grow���and that growth has helped share price valuations remain reasonable.

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About Those Bonds

AT THE MUTUAL FUND company where I��once��worked, the stock and bond teams��liked to��poke��fun at one another. Bond managers viewed the stock-pickers as overpaid storytellers. Meanwhile, the stock-pickers saw the��world of bonds as stultifying. ���Playing for nickels and dimes��� is how one of them put it.

For better or worse, bonds do indeed represent the slow lane. But this year, with bond prices depressed by rising interest rates, investors��are wanting to learn more. Below are the��seven questions��I���ve been hearing��most��frequently.

1. Bonds are down some 10% in 2022. How do I think about risk?��The trickiest thing about bonds is that they carry two entirely separate types of risk. The first is called credit risk, and it���s the easier one to understand. This represents the risk that a bond issuer might fail to make all its required payments. When this happens, it���s called a default. The result is usually a sharp decline in the bond���s price.

When Enron went bankrupt, for example, its bonds declined to��17 cents��on the dollar. With only a few obscure��exceptions, though, the U.S. government has never defaulted on its debt. For that reason, these are the bonds I recommend most frequently.

But as we���ve seen this year, even U.S. government bonds can decline in price. That���s because of the second category of bond risk, known as duration risk.

The duration formula is somewhat involved. But in short, it's a measure of how long it���ll take investors to get their money back. The longer the duration, the longer the wait. The problem with waiting: When rates rise, newer bonds sporting higher rates become more attractive. That depresses the price of older bonds with lower rates. The longer a bond���s duration, the longer its owner is stuck with that lower rate. That���s why bond prices drop when interest rates rise, and why bonds with longer durations experience larger declines.

A good rule of thumb: When you invest in bonds, align the duration of those bonds with your timeline for needing those funds. Saving for a home down payment next year? I���d opt for a duration of a year or less. You can find bonds of virtually every duration.

2. What about international government bonds? Don���t they pay higher rates?��This is a reasonable question. I don���t worry about major developed countries defaulting on their debt. But there���s another problem: currency fluctuations. Because bond yields are so thin, it���s easy to lose money on a foreign bond just because the dollar strengthens a little.

3. Will bond prices keep dropping?��What we���ve seen this year is unnerving. But keep in mind that a bond is just like any other investment: If its price has dropped, it now represents better value, all things being equal.

Yes, the Federal Reserve could continue raising rates. The Fed has indicated it plans to do so, and that would put further downward pressure on bonds. But here���s the key thing to keep in mind: Rising rates also have a silver lining. If you���re invested in a bond fund, the fund manager is now able to buy new bonds with more attractive rates. Those higher interest payments will help offset losses you experience if bond prices fall further. Eventually, you���ll reach a breakeven point. How long will that take? Again, duration is important. The longer the duration, the longer it will take to break even.

4. Does that mean you should only ever invest in short-term bonds?��No. Historically, the vast majority of the return from bonds has come from interest payments and not from price changes, so it can be worthwhile to own longer-term bonds if they���re paying more. Today, however, longer-term bonds aren���t paying much more than shorter-term bonds, which is why I'm happier with short-term bonds right now. But this situation won���t last forever. As a bond investor, I think it makes sense to diversify between short- and intermediate-term bonds.

5. A bond manager is promoting rates of 5%���much higher than prevailing rates. How is that possible?��When you buy a stock, it���s straightforward. If the price is $100, you pay $100 and hope it goes up. But with bonds, it���s more confusing. Bonds have a face value���usually $1,000. But they���ll often trade at either a premium or a discount���that is, higher or lower than the face value. Regardless of what you pay, though, the bond will still only pay $1,000 at maturity.

This is a reason to be careful. Don���t be misled by the coupon payments a bond offers. That represents just one part of a bond���s return. The other component is the difference between what you paid and the $1,000 you receive at maturity.

Let���s come back to the fund manager trumpeting that 5% interest rate. What���s actually going on? The bonds do indeed pay 5% coupons. But in the current environment, with rates closer to 3%, bonds paying 5% will be trading at a premium, meaning they���ll cost more than $1,000.

Consider a simplified example. A bond offering a 5% rate, with one year to maturity, might cost $1,020. What will happen over the next year? You���ll collect a 5% interest payment. But at maturity, you���ll��receive��only�����$1,000, not��the $1,020 you paid.��� That represents a 2% loss.��Thus, the net return will be 3%, not 5%.

The lesson: Don���t be distracted by the interest rate on a bond. What you want to look at instead is its yield to maturity. That represents the net return investors will actually receive���3% in the above example.

6. If yield to maturity is what���s important, what does it mean when mutual funds report their distribution yield or SEC yield?��These are confusingly similar terms. If you���re looking at an individual bond, its yield to maturity is the most useful figure. But if you���re looking at a bond fund, you may see only its distribution yield and its SEC yield.

I wouldn���t put much stock in distribution yields. First, they���re backward-looking. They extrapolate from past income distributions. In a normal environment, that might be reasonable. But when rates are rising, as they have this year, it makes no sense to extrapolate from past returns. Further compounding the issue: Fund companies each calculate this figure��differently, making it minimally useful for comparing investment options.

The SEC yield, on the other hand, does provide a common yardstick for comparing bond funds. While it too extrapolates from a fund���s recent income, it does so in a more meaningful way. In addition, it accounts for a fund���s internal expenses. That���s why, if you���re looking at a fund, this is the figure I���d consult.

7. Should I own individual bonds or a bond fund?��In theory, the performance of a bond fund should simply be the aggregate of all of the bonds it owns. For that reason, there shouldn���t be much difference between the performance of an individual bond and the performance of a fund that holds a group of comparable bonds.

There���s one caveat, though: When you���re a shareholder in a mutual fund, it���s like sharing an elevator with a group of strangers. Everything should be fine���as long as everyone behaves. In the context of a mutual fund, what does it mean for other investors to behave? You want them to be patient, especially when the fund is having a tough year, like this one.

What happens if fellow investors pull out of a fund after it���s dropped? The fund manager may need to sell some of the fund���s holdings to raise cash. That would disrupt the portfolio, trigger trading costs and perhaps lead to larger tax bills for the shareholders who remain.

In ordinary times, I have no problem with bond funds. In fact, they offer a number of advantages. In today���s environment, however, there���s no guarantee that everyone on the elevator will cooperate. For that reason, I think individual bonds make more sense than in the past.

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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Rates Up Fed Down

THE FEDERAL RESERVE has been the biggest buyer of Treasury and mortgage-backed bonds for the past decade. In that time, it expanded its balance sheet from about $800 million to more than $8 trillion.

As long as inflation remained low, its bond purchases helped produce a slowly growing economy by keeping interest rates and unemployment low. Now that inflation is at its highest level in 40 years, the Federal Reserve is starting to raise interest rates in response. One result: The financial condition of the Federal Reserve itself could get ugly.

The System Open Market Account, or SOMA, is used by the Federal Reserve for all its open market operations, including purchasing and selling domestic securities and foreign currency. Every bond it purchases goes into SOMA.

Unlike public and many private businesses, including the banks it regulates, the Federal Reserve does not follow Generally Accepted Accounting Principles (GAAP). Instead, the Fed follows its own rules that allow it to defer any unrealized gains or losses until it sells the securities it holds.

As the SOMA���s balance sheet grew and interest rates fluctuated, the value of those bonds moved up and down. After 2008, interest rates generally followed a downward trend that had started in the 1980s. The unrealized gain in SOMA bonds reached $400 billion in 2020.

But two short periods of rising rates, in 2013 and 2018, led to net unrealized losses of approximately $60 billion. Still, the Fed closed out 2021 with an unrealized gain of $128 billion.

Analysts blamed the Great Financial Crisis of 2007-09 on increased leverage in the financial sector, as well as the inability of financial firms to weather the plunge in the value of the mortgage-backed securities on their books. In truth, financial companies have almost always been more highly leveraged than other sectors of the economy.

During the 2007 crisis, leverage at investment banks like Bear Stearns and Lehman Brothers reached around 30-to-1, meaning one dollar of equity supported $30 of borrowed money. With 30-to-1 leverage, a relatively small 4% loss could wipe out these firms��� capital���and it did.

In an ironic twist, to save the banking system, the Fed purchased these and other firms��� ill-liquid assets with borrowed money. Following four rounds of bond buying, the Federal Reserve has an $8.5 trillion bond portfolio. Its portfolio is supported by a capital balance of $48 billion���or a leverage ratio of 177-to-1.

The Fed���s SOMA holdings are mostly fixed-coupon Treasury notes and mortgage-backed securities. Just as with any bond, rising interest rates cause these bonds to lose value.

In the first six months of 2022, the Federal Reserve raised interest rates by 1.5 percentage points. As a result, its $8.5 trillion bond portfolio fell roughly 10%, suffering���by my estimate���an unrealized loss of $850 billion.

This represents a loss equal to 17 times the Fed���s capital. Arguably, the Fed is technically insolvent. Following the accounting rules used by the Fed, however, these unrealized losses will only appear on supplemental disclosures. The Fed will never post them to its balance sheet.

As the unrealized losses grow more significant, however, some problems will arise. The first problem is political, as members of Congress realize that the Federal Reserve is sitting on assets that are worth billions less than their purchase price.

The second problem is more practical. The Fed doesn���t want to sell any of the bonds in its portfolio, preferring to reduce its balance sheet by allowing bonds to mature and then not reinvesting the proceeds.

Yet the odds are growing that simply raising short-term rates will not be enough to arrest inflation to the desired degree. Shrinking the SOMA account balance will be required, because selling the Fed���s bond holdings should depress bond prices and hence push up longer-term interest rates, helping to slow the economy and damp down inflationary pressures. Problem is, that would force the Fed to realize losses, which would exacerbate its first problem���owning a portfolio worth less than its cost.

The third problem affects the Fed���s operational flexibility. The Fed adopted its accounting standards to manage its unique organizational status. But suppose it has to start selling off assets. It wouldn���t be able to ignore the resulting losses for long. That could limit the availability and usefulness of its ability to buy and sell bonds, a key monetary tool.

The final problem is cash flow. Since 2007-09, a growing balance sheet has left the Federal Reserve increasingly profitable on a cash flow basis. The Federal Reserve receives interest income on its $8.5 trillion bond portfolio. It also pays interest on much of its liabilities, primarily $5.6 trillion in reverse repurchase agreements and bank reserves. The rest of its liabilities is the cash in the economy.

The Federal Reserve remits its profits back to the U.S. Treasury. They amounted to more than $107 billion for 2021. The interest earned on its bond portfolio is relatively low and fixed. By contrast, the interest expense on its liabilities floats and increases each time it raises short-term interest rates. The more the Fed raises interest rates, the more interest it has to pay out���and the less profitable it becomes.

My analysis suggests that, after the Federal Reserve���s latest increase in the federal funds rate to 2.25% to 2.5%, it will begin paying out more in interest than it���s earning on its bond portfolio. Moreover, following recent inflation reports, it���s increasingly likely rates will need to move at least to 4%, and possibly higher, to get inflation back under control.

Too much leverage always has consequences, and the costs are becoming apparent for the Fed. The income boost the Federal Reserve gives the U.S. Treasury is likely over for now.

How can the Fed minimize its operational losses? Some ideas include cutting the interest paid on its liabilities, raising reserve requirements for banks���on which the Fed pays zero interest���or reducing the balance sheet faster by selling bonds and realizing losses. None of these options is perfect, and all have downsides.

In an extreme event, the fund flows from the Fed to the U.S. Treasury could reverse. Though it���s improbable, imagine Fed Chair Jerome Powell going hat-in-hand to Treasury Secretary Janet Yellen and Congress asking for a couple hundred billion to rescue his balance sheet. The bottom line: Many observers see the Federal Reserve as all-powerful. But in years ahead, the Fed may not be able to throw around its weight the way it used to���and that could have major consequences for the economy.

Phil Kernen, CFA, is a portfolio manager and partner with Mitchell Capital , a financial planning and investment management firm in Leawood, Kansas. When he's not working, Phil enjoys spending time with his family and friends, reading, hiking and riding his bike. You can connect with Phil via LinkedIn . Check out his earlier articles.

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Check on Yourself

MEET THE LATEST feature added to HumbleDollar���as well as the website's first calculator: the Two-Minute Checkup.

How does it work? All you need to do is input up to nine pieces of information, the sort of stuff most of us know off the top of our head. There's no need to create an account or link to your brokerage firm or bank, and none of your information is saved on HumbleDollar or anywhere else.��Once you input your info, hit the "results" button and the calculator will offer insights across 10 areas of your financial life. It's that easy.

The Checkup has been tested by me and countless others, and���fingers crossed���it should offer sensible suggestions, no matter what your financial situation. Still, a calculator like this is only as good as the assumptions that underpin it. Want to know more? All the gory details can be found here.

The Checkup was first developed in 2017 by me and Derek Mayer, my partner in a business venture that never got off the ground. But it existed only as a spreadsheet until this year, when��HumbleDollar contributor and software engineer Sanjib Saha turned it into computer code���and he did it free of charge. Yes, you read that right.

Intrigued? Please take the Two-Minute Checkup���and, if you like what you see, please share it with friends and family. I believe the Checkup could help a lot of folks with their financial life. I hope you agree.

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Earning a Roth

HAVE YOU GOT children or grandchildren with summer jobs? That means you could put them on the path to financial success���by helping them open a Roth IRA.

My brothers and I always had jobs, including delivering newspapers, bussing tables, mowing lawns and valet parking. My sons also had jobs at an early age, including shucking thousands of ears of corn at our local swim club. Later on, they were lifeguards, along with many of their friends from the swim team.

We all remember our first jobs���fondly, I hope. Getting a paycheck, realizing how taxes work and learning what FICA means���Federal Insurance Contributions Act, if you���ve forgotten���are all invaluable lessons on the road to adulthood. But today���s summer jobs come with a potential added bonus: opening and funding a Roth IRA.

An IRA is a great way to introduce a child or grandchild to the world of saving and investing. A Roth IRA will almost certainly make more sense than a traditional IRA. Most children won���t owe income taxes on their slender summer earnings. That means they wouldn���t benefit from a tax-deductible contribution to a traditional IRA.

IRA contributions and earnings grow tax-deferred. But with a Roth, the account���s earnings can also be withdrawn tax- and penalty-free after age 59��. Meanwhile, the actual money contributed can be withdrawn tax- and penalty-free at any age. The rationale: Those contributions were made with after-tax income. If retirement seems too distant a goal to excite your children or grandchildren, you might let them know that special rules also allow penalty-free withdrawals before age 59�� for���among other things���a first-time home purchase or to pay college expenses.

Intrigued? There are several things to know if you���re helping a child or grandchild set up a Roth IRA:

A child must have earned income to contribute to either a traditional or Roth IRA. Even cash income from babysitting or lawnmowing counts.
Contributions to an IRA can come from any source, but can���t exceed the amount of earned income for the year. If your granddaughter earns $1,000, you can contribute $1,000 to her Roth, and let her save or spend her earnings on other things.
A child���s IRA must be set up as a custodial account by the parent or grandparent.
You���ll need to know the child���s Social Security number to open the account.
The account will be managed by the custodian until the child reaches the age of majority, generally 18 to 21, depending on your state���s law. Control of the account then shifts to the child.

To avoid possible complications, keep records of the child���s income. A W-2 or 1099 is usually sufficient. If the child works for cash, keep a log of his or her income in case the IRS should ever ask. The IRS has several rules defining when a dependent child must file an income tax return. If a child works for cash or has tip income, he or she may be liable for self-employment taxes.

Opening a Roth IRA and filing a first income-tax return are two great steps in a child���s financial education. I look forward to the day when my grandchildren have earned income so we can start them on a lifetime of investing.

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Twelve Travel Tips

I RECENTLY VISITED Eastern Europe, where I volunteered to teach English in Poland through an organization called Angloville. I received free room and board at a resort in exchange for conversing from breakfast through dinner with Polish adults who wanted to improve their English.

In addition to meeting Poles and being immersed in Polish culture, I used my free time to explore nearby countries. Planning a vacation abroad? Based on my recent trips to Poland, Germany, the Czech Republic, Slovakia, Austria and Hungary, here are 12 things to keep in mind as you pack your bags and plan your trip:

A 220-volt adapter set. Pack adapters to charge your electronics. It might be difficult to charge your phone or iPad without them. I learned this the hard way on my visit to Berlin. Luckily, the hotel���s front desk had an adapter I could borrow.
MasterCard and Visa. Many countries only honor MasterCard or Visa and not American Express. The good news is that most purchases can be charged, bypassing local currencies. Your credit card should also give you a fair exchange rate, and the U.S. dollar is strong against the euro right now.
Airline lounges. These are insurance against long layovers, flight delays and crowded terminals���all epidemic nowadays. When I had a six-hour layover in London, I took a shower in the lounge. It also had free food, drinks and comfortable seating. I stopped at the lounges in Dallas-Fort Worth and Warsaw airports during my recent travels, as well.
American Express. The major reason to carry the American Express card is to gain free entry to airport lounges. It doesn���t take too many visits to feel that the card���s cost is worth the sanctuary it can provide in a crowded airport.

Seat61.com. This train travel site was invaluable in my rail journeys through five nations and seven cities. I booked my trips 60 days in advance for international train journeys, and 30 days if traveling within one nation. I paid a few dollars more for first-class seats, which saved the day when trains were overbooked and not everyone got a seat. I used the site to book a berth on the overnight train from Vienna to Berlin, arriving at 10 a.m. freshly showered and well rested. Sleeper trains tend to sell out early, so book them even more than 60 days ahead.
Currency exchange. Yes, they charge high fees, but���surprise���not every European nation uses the euro. I needed a few forints in Hungary and the zloty in Poland for little things, such as coins for the public restrooms. For me, this was a return visit to Poland���and a former student exchanged some zlotys for dollars, so I eliminated some fees that way.
International phone plans. Wi-fi is available in most hotels. Still, I needed phone service from AT&T at $10 a day for two reasons: Google maps and Uber. I used the map function almost everywhere I walked. I relied on Uber if mass transit was confusing. Uber or Bolt was available in every country I visited and was still quite affordable. Many drivers didn���t speak English but were able to drive me where I needed to go.
Rome2rio.com.��If I was in town for a few days, I���d attempt to take mass transit. This��website helped explain which trams to take and when they were available. It was also a good backup site for train schedules.
Tripit.com. I used Tripit to keep a detailed copy of my itinerary easily accessible on my phone. I forwarded my travel emails to the site so I could access all the information on my flights, hotels, trains and tours. I did carry a paper backup but didn���t need it except to scan QR codes for trains.
VisitACity.com. This app and website has lists of things to do in thousands of cities, plus maps with walking distances between activities. It gave me good general information, though���to save on walking and to get more personal attention���I frequently took Segway tours.
Hotels near train stations. As I was in most cities for only a couple of days, I limited myself to hotels near train stations. I was able to find conveniently located four-star hotels with a full breakfast for less than $100 a night.
Angloville. I've traveled twice to Eastern Europe to take part in this immersive teaching experience. You must love to talk because English training sessions go from morning until night. Of course, this is a great way to meet others, such as the fellow teacher I saw in Bratislava, Slovakia, where we spoke with Ukrainian refugees one evening. I was even serenaded on my birthday at an Angloville resort. An opera singer wished me ���sto lat������may you live 100 years.

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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Retirement Is Coming

AM I ALLOWED another rant?

I have a tip for anyone under age 50. Someday���if you���re lucky���you���ll stop working and still need income to live. Most of us call that retirement.

How in the world do people reach their 50s and suddenly have a revelation that retirement is somewhere in their future?

I get it. If you���re in your 20s or even early 30s, it���s time to have fun. But there���s the trap. Fun for too long, without long-term planning, can mean a not-so-fun old age. Trust me, old age���which I refuse to acknowledge���sneaks up on you.

I frequently read about the plight of retirees and their surviving spouses���especially the surviving spouses���and think, ���How did that happen? How can they be living only on Social Security?��� These aren���t necessarily people who were poor all their lives. Many are average Americans.

The poor have any number of safety net programs at both the federal and state level. It���s the people who don���t qualify for most assistance who really need to think about their future. I���m talking about the people who blow a tax refund or their stimulus check on ���stuff,��� instead of using the money to open an account that could jumpstart their retirement nest egg.

I remain convinced that the overwhelming majority of Americans can save something every month. For Pete���s sake, at a minimum, put your daily change or a few dollar bills in a jar every evening, and go from there.

Then there are the folks who claim they don���t know what Medicare will cost, what Medigap will cost, what they���ll receive from Social Security, how much retirement income they���ll need. A modicum of effort will get you answers. For goodness' sake, get your head out of the sand.

I see all this ���not knowing,��� even as I read about young people planning to retire in their 50s. I couldn���t retire in my 50s, even with a pension. I was still paying a mortgage and college bills. Besides, my wife wouldn���t go for the idea. Just imagine spending three or four decades in retirement with me ranting, I mean, writing cogent words of wisdom.

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