Jonathan Clements's Blog, page 217
April 17, 2022
Let Others Despair
But right now, many areas of the stock market are doing about what you���d expect. After all the efforts by the Federal Reserve and Congress to prop up the economy over the past two years, rising inflation is front and center, along with rising interest rates.��Shares of growth companies, seen as more sensitive to higher interest rates, are in severe decline. Meanwhile, commodities���after pulling back slightly in late March���are climbing once again.
With inflation soaring and the stock market spluttering, investors seem to be giving up hope. The weekly survey from the American Association of Individual Investors shows a nearly 30-year low in optimism.
Sentiment data released last week by CNBC tell a similar story. The network���s All-American Economic Survey found that just 28% of investors think it���s a good time to be in stocks. That���s the lowest figure in the survey���s 15-year history. Meanwhile, Bank of America���s Bull/Bear Indicator is flashing extreme bearishness right now.
All this despondency may be good news for long-term investors. When people are most frustrated by stocks and the overall economy, decent returns often follow. If you���re like many folks and nervous about where financial markets are headed next, consider that risk is usually highest when euphoria abounds. That was true in early 2021, when the junkiest of stocks were all the rage. The waning enthusiasm we���ve seen since then may be exactly what we needed.
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It All Depends
Many other financial questions, though, might��seem��to have clear answers. But upon closer examination, they actually fall into the ���it depends��� category. Below are six such questions:
1. Should I waste money?��Consider two investors. One has a $500,000 portfolio. The other��used to��have a $500,000 portfolio. But now he has just $200,000���after spending the other $300,000 on a Ferrari. Most people would probably view the first investor as being a better steward of his finances and the second as a terrible money waster. But was that Ferrari really a waste? I think it depends.
Let���s set aside the question of whether the car might become a collector���s item and thus appreciate in value. Instead, let���s just see it for what it is: an exceptionally expensive toy. Through that lens, is it a waste of money? If so, is that okay? In my view, there���s a fundamental litmus test to answer this question. You should simply ask: Will this expense jeopardize my long-term plan? In the above example, suppose the Ferrari owner has other sources of income���such as a government pension or maybe income from a rental property. If that���s the case, his portfolio���s size might not matter and objectively it wouldn���t be an irresponsible choice.
The bottom line: Some might see a six-figure car���or a similar extravagance���as an egregious waste. But if you can afford something, and if it will bring you happiness, then that's what matters. We're each different and value different things. I wouldn't let anyone else judge you���and I wouldn't feel the need to judge yourself.
2. Should I own international stocks?��Jack Bogle, founder of Vanguard Group, was famous for saying that he never owned international stocks in his personal portfolio. He didn���t see the need. Bogle certainly had the data to support his view. The correlation between U.S. and international stocks is usually between 0.7 and 0.9. Correlations are measured on a scale from -1 to 1, so this indicates a high level of correlation.
By contrast, many bonds have very low correlations with stocks. In other words, international stocks offer some diversification benefit, but it���s limited. Bonds, on the other hand, offer a far easier and more effective route to a diversified portfolio. Does that mean that, like Bogle, you shouldn���t own international stocks? It depends.
There���s an important reason an investor might want international stocks. Yes, Bogle was right that international and domestic stocks are highly correlated. Still, they aren���t��perfectly��correlated. Because of this, Vanguard's own research indicates that an allocation between 20% and 40% to international stocks might yield the optimal diversification benefit. International stocks can indeed help lower a portfolio's volatility.
But if, like Bogle, you prize simplicity and don���t mind a little more volatility, then you might forgo international stocks. Remember, there���s a difference between reducing a portfolio���s volatility and increasing its returns. International diversification has been proven to deliver only the former���but not necessarily the latter.
3. Should I cancel my life insurance policy if I no longer need it?��If your assets have grown over the years, and your children are out of the house, the math might indicate you no longer need life insurance. Does this mean you should cancel it? It depends. There are at least two cases in which you might decide to retain a policy, at least for the time being.
If you have a policy with some cash value, such as a whole-life policy, you���ll want to do the math carefully. It may be that the accumulated gains in the cash value would leave you with a big tax bill if you liquidated the policy. If that���s the case, you might keep the policy going until retirement, when you could be in a lower tax bracket. In the meantime, you might look into a��1035 exchange��to lower the annual carrying costs.
The other reason you might retain life insurance even when the math says you don���t need to: because life is uncertain. I���ve seen more than one family choose to retain life insurance beyond when it���s objectively necessary. If it provides additional peace of mind, and the cost isn���t burdensome, I see nothing wrong with that.
4. Should I worry about estate taxes if I���m clearly under the federal exclusion���currently $12 million per person?��It depends. The first thing to know: In 2026, the current estate tax laws will sunset, and that $12 million limit will be cut in half to $6 million. More important, none of us knows how long we will live. Because the estate tax is a political football, there���s no way to know what rules will be in place in the year we happen to die. George Steinbrenner��got lucky, but that���s more the exception than the rule. I see estate planning as an important exercise for all high-net-worth families.
Another reason to take estate tax planning seriously: While the federal tax is the one most people worry about, don���t forget that��many states��also levy their own taxes, with exclusions that start at much lower levels. In Massachusetts, for example, the estate tax applies to those with just $1 million of assets.
5. Should I contribute to my 401(k) or 403(b)?��If you���re in the heart of your working years and in a high tax bracket, it might seem smart to defer taxable income into a retirement account. But is this always the right choice? It depends. The fundamental consideration is whether your tax rate this year will be higher or lower than you expect it to be in retirement. In many���if not most���cases, this is an easy question to answer. Without a salary in retirement, it stands to reason that your tax rate will drop considerably. But that���s not true in all cases.
Suppose you have rental properties that generate considerable income. Or maybe you have a traditional pension. Or maybe you���ve taken advantage of additional tax-deferred accounts over the years, such as a cash-balance pension plan, that���ll result in substantial required minimum distributions. In all those cases, your tax rate might be just as high in retirement. That���s why, especially as your career advances, it���s important each year to do the math before making further retirement contributions.
6. Should my asset allocation get more conservative as I get older?��The answer to this might seem obvious. But there are cases in which it makes sense to��increase��your allocation to stocks as you get older. Suppose, for example, you have a $5 million portfolio with an asset allocation of 50% in stocks and 50% in bonds. Let���s also suppose that you���re planning to take out $1 million for a summer home in the year you retire. After that, your portfolio probably doesn���t need to be as conservative. Because a significant goal will now be behind you, you might be able to lift your stock allocation to, say, 60%.
Another example: Suppose you retire at age 65 but delay Social Security until 70. Without Social Security benefits during those initial years, your portfolio withdrawals will be higher than they���ll be after age 70. All things being equal, you���d want your portfolio to be positioned more conservatively during your retirement���s first five years. You could then get more aggressive later, when your withdrawal rate will be lower.
Adam M. Grossman��is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman��and check out his earlier articles.The post It All Depends appeared first on HumbleDollar.
April 16, 2022
Stocks and Steaks
I then forwarded an uncomfortable amount of personal information, financial statements and tax returns to a man I���d never met. Scott seemed like a nice enough guy, but hey, ���let���s be careful out there.���
When we met, Scott provided a general review of my finances. While it was quite evident that he didn���t want to give away anything for free, he mentioned that I needed to ���Rothify��� a fair amount of my 401(k) before required minimum distributions increased my income in a few years. He also mentioned that, as my taxable account contained a fair number of individual stocks with a fair amount of unrealized capital gains, he was more interested in managing my 401(k). But given that my 401(k) was invested in low-cost index funds, the feeling wasn���t mutual.
Scott sent me a follow-up email, asking if I was interested in him managing my portfolio for an unmentioned fee. The fee was mentioned at the earlier meeting, but I don���t remember the exact number. I���m thinking it was around 0.75% of assets. I didn���t reply to Scott���s email, which wasn���t cool. I should have, but then waited too long, and then every day that went by it became that much harder until��� I felt I���d waited too long and that it was now too late.
Just recently, I received an email from Carl Carlson, the eponymous CEO and founder, offering me an invitation to a ���MUST-ATTEND LIVE EVENT��� that would touch on ���How The World Affairs Affect Your��Financial��Affairs!���
I wasn���t sure if I should take Carl up on his offer, as I still felt a little guilty after not getting back to Scott. Not replying to a business email just isn���t professional and I was still a little embarrassed. I then realized that his invitation was the perfect opportunity for me to express my apologies���while enjoying a complementary eight-ounce filet mignon. I immediately RSVP���d because ���This event may fill up fast���guarantee your reservation now!���
I was then offered the option to bring a guest and select an entree. Since my wife also wanted an opportunity to apologize to Scott for my lack of manners, I included her. We were both offered the option of eight-ounce filet mignons, salmon filet or a roasted chicken. Since there are no half measures in our family, we went with two filet mignons.
When I arrived at the steakhouse, I was interested in learning about the specific world affairs that would affect my financial affairs, if my filet would come with creamed spinach and when Scott would arrive. Unfortunately, no affairs were mentioned, my filet came with mashed potatoes, and Scott had been promoted and was therefore unavailable to accept my apologies. I did, however, chat with Ryan, his younger brother and replacement.
Carl���s daughter was in attendance. She spoke at length about how Carlson would construct a portfolio just for me that was like a house, with a foundation of safe investments like certificates of deposit, walls with dividend stocks and a roof with���. Well, I���m not quite sure how my roof would be constructed, as that���s when my filet mignon arrived.
She also teasingly mentioned that Carlson = Independence + Fiduciary + Transparent Fees. But she never mentioned what the fees actually were.
Ms. Carlson then related an interesting story about a financial review for a married couple. He was age 76, she was 56. At their current spend rate, they would run out of money in 20 years. He was not that concerned, but for some reason she was. Carlson did some analysis and determined that, by shifting their investment mix, they could extend the portfolio���s solvency by at least another 20 years. I find it interesting that financial advisors always seem able to adjust a portfolio to avert catastrophe, so they never have to insist that clients change their spending rate.
After the cheesecake was served, I was asked to if I wanted to schedule a ���free retirement review.��� I said no, because���after the review���I didn���t want to not get back to Ryan. It was important that I break this insidious cycle.
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April 15, 2022
Driven to Succeed
THIS IS ABOUT a journey, about what can happen and what you can make happen. It���s about starting at the bottom and, over more than 50 years, achieving financial independence.
My financial views were heavily influenced by my parents, especially my father, but not in the way you might imagine. My father was a car salesman. For many years, he worked seven days a week, from 8 a.m. to 8 p.m. He was let go from his job at age 67. Thereafter, my parents lived solely on Social Security. But I never heard my father complain. I never heard him express envy of others.
In his final working years, my father sold Mercedes. He could never afford one himself, but he was allowed to use one of the demo cars. When I was 17, I got to drive a 300SL in a parade. Owning a Mercedes became a lifelong dream. That���s all it was until 2004, when I opened a bank account solely to save for that car. It took me a decade, but eventually I paid cash for a Mercedes E350 in 2014. Three days later, my wife and I started off on a trip across the U.S. I was age 71.
I had seen my parents struggle financially for their entire lives, and I wanted to avoid that at all costs. I wrote in my 1961 high school yearbook that, ���I will be a millionaire someday.��� Adjusting for 60 years of inflation, I didn't make it, but I did okay.
I was born in 1943, and I have a very different perspective from many younger Americans. I recall periodically crawling under my schoolroom desk, practicing for a nuclear attack. I remember when a woman���s place was in the home and discrimination was the norm. I recall when the mandatory retirement age was younger for women than for men.
I���m aware of how lucky I���ve been. My current financial state was achieved with a lot of help from others and thanks to a life largely devoid of significant uncontrollable misfortune. For all that, I am grateful. Still, I do take a modicum of credit for perseverance and fiscal prudence���greatly assisted by my wife.
Clambering upward. When I graduated high school in 1961, two things were on my mind. First, find a job���any job���and, second, when would I be drafted. At age 18, I started my career as a mail boy, the lowest-paid person in a company of 15,000 workers, earning $1.49 an hour.
Four months later, I attempted to sign up to buy U.S. savings bonds through payroll contributions. ���Don���t bother,��� my manager said, ���you won���t be here that long.��� I had only just started working and I was about to be laid off.
Fortunately, the union stepped in and convinced the company to give me a job as a clerk in the employee benefits department, provided I went to night school to learn to type. There was a side benefit to that newly acquired skill: When I entered active duty in the Army in 1968, I quickly went from truck driver to personnel sergeant. That meant I got to work in an office.
My initial foray into investing involved penny stocks. It lasted several years���and it didn���t go well. When I was on active duty, my wife and I were engaged, and I came home one weekend so we could buy her a ring. In anticipation of paying, I sold one of my stocks at a loss. But when it came time to pay for the ring, the jeweler told us we could wait until the fall, when I next came home on leave. That stock I���d sold at a loss? If I had waited to sell, the profit would have paid for the ring.
Meanwhile, it took me several years to get the message about college, in part because it was a subject never mentioned when I was growing up. My father and mother only graduated high school, my grandfather 8th grade, my great-grandfather was illiterate. While two of my high school friends were off to Princeton and Harvard, I was off to find a job.
Still, I knew that, if I wanted to get ahead, I needed a degree. But I was never a motivated student. Finally, 17 years after graduating high school and after nine years of school at nights and weekends, I obtained a degree. I barely saw my four children during those years. But there were no student loans involved. Veteran���s benefits���the result of my time in the Army���paid for most of it.
Several years later, I was in a department staff meeting. One of the participants���she had a PhD���suggested we go around the room and tell where we���d received our degrees. I immediately felt embarrassed. I knew some of the schools that the others had attended: Stanford, Carnegie Mellon, Princeton, Vassar. When they got to me, I named a community college and a mediocre state university. But by then, time and experience had done their job: I was the highest-paid person in the room.
By 1982, I was a manager in the company���s employee benefits department. That was the year we introduced a 401(k) plan���and the year I became serious about investing. I always contributed at least enough to obtain the company���s matching contribution. My wife and I adjusted our spending to make sure that happened, even during the years when we were paying college costs for our four kids.
But my best investment was the pension I earned based on 50 years of service. That pension, coupled with my 401(k) savings and other investments, mean my wife and I today are financially secure. Indeed, my pension���along with Social Security���cover our basic retirement expenses and much more.
If you spend 50 years at one company, you become pretty loyal���maybe too much so. After my time in the Army was up and I was back at my employer, I signed up for the company stock purchase plan at $5 per week. I continued contributing my entire career. More than 50 years of regular investing and reinvesting dividends really adds up.
On top of that, in 2000, I started receiving stock options as part of my compensation. The size of the grants was quite modest by most standards, but I was pleased. Unlike most recipients, when the options vested, I converted most into company stock. Today, shares of my old employer are 34% of my taxable investment account and my accumulated shares generate significant dividends. But I won���t pretend that sort of big investment in a single stock is prudent.
Fulfilling dreams. Yes, I���ve been fortunate. But my wife and I also never caused bad things to happen. We lived on one income, never carried credit card debt and saved every month, no matter what expenses we faced.
Our first house was built in 1918. When we bought it���with a mortgage costing 9��%���we agonized over our ability to afford it. I tallied the total payment, including the mortgage and property taxes. Try as we might, it didn���t look feasible, but we did it anyway.
We lived in that first house for five years. Our second house was a few blocks away. It had been built in1929, with none of the amenities expected of homes today. It had three bedrooms, one the size of a large walk-in closet, two bathrooms���one a converted closet���and a tiny kitchen. We lived there 43 years.
Until I purchased a Mercedes in retirement, we only ever owned basic vehicles. No power anything, no air-conditioning. We kept them until���in three cases���the engines blew up. Once we had an older Chevy stolen. The police called to say they had found it abandoned. I went and ���stole��� it back, cleaned up the food and other garbage in the backseat, had it repaired and kept it for five more years���until the engine blew.
For 10 years starting 1988, we had one, two or three children in college at once. Frankly, I���m not sure how we paid for all that, but I do recall a 401(k) loan, a home equity loan and remortgaging our house. I also started what folks now call a ���side hustle.��� I published a newsletter about employee benefits and put on conferences. In the process, I���d often put the entire family to work, including paying the children to stuff envelopes.
The financial stress of putting our kids through college would have been less, but we were determined to pay the entire cost of their education���plus I made a large, emotionally driven financial decision just before the oldest went off to college.
For many years, my father worked totally on commission, with no paid vacation. But in 1953, when I was 10 years old, we went to Cape Cod for a week. It���s the only family vacation I can recall. A friend gave my father a tip on a great place to stay. In his enthusiasm, my father booked for a week and paid in advance.
The motel turned out to be worse than an Army barracks. My mother refused to stay. To get his money back, we all agreed that I would have a sudden asthma attack, necessitating our immediate departure. That worked, my parents got their money back and we then stayed in several places on the Cape, ending up in Chatham, Massachusetts. Even at age 10, I was hooked.
Fast forward 23 years. In 1976, in a moment of enthusiasm, I said to the family, ���Let���s go to Cape Cod.��� Amazingly, most of the places I remembered from 1953 were still there. From that summer on, we spent vacations on the Cape in a motel or a rented house. On every trip, I expressed my desire to buy a vacation home in Chatham, as unrealistic as that was. I even subscribed to a local newspaper. Every week, I longingly checked the homes that were listed for sale. After several years, my family didn���t want to hear about my daydreaming anymore. But I kept looking.
In February 1987, I found a house that was old but appeared financially feasible. I was warned that if I didn���t buy a place this time, the family was never going house-hunting again. By mistake, we went to the wrong real estate office and they showed us a new house that, at $159,000, was in our price range. It had three bedrooms and two bathrooms���just right.
After some wrangling with the bank, we put down 10% and got a 30-year mortgage at 9��%. I was delighted, as was my family, partly because they wouldn���t have to listen to me each time the Cape Cod newspaper got delivered. In the initial years, we could afford the house only by renting it for most of the summer.
Over the past 35 years, we���ve spent more than $300,000 on additions, remodeling and maintenance on the Chatham house. On top of that, there���s been property taxes, utilities and insurance. Today, the house is valued at more than twice what we paid, including the cost of improvements. But no matter���I never saw the house as an investment. It was fulfilling a dream and buying years of family memories. My only regret is that my father never got to see the house���or, for that matter, the Mercedes.
Richard Quinn blogs at QuinnsCommentary.net. Before retiring in 2010, Dick was a compensation and benefits executive.��Follow him on Twitter��@QuinnsComments��and check out his earlier��articles.
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Missing in Action
As you might imagine, the book has meant a lot of work for the writers involved���and a ton of editing for me, with an able assist from HumbleDollar's deputy editor, Greg Spears, and also some help from Joe Kiefer. Earlier this week, I finished editing essay No. 28. That means I have one more essay to edit (you know who you are), and then my own essay and the book's introduction to write, plus some fine-tuning to do.I don't mention this just to whet your appetite for the book to come. I've also been receiving a surprising number of emails, asking whether I've fallen ill or departed the site for greener pastures. Rest assured: I'm still here.
While I haven't had time to do much of my own writing in recent months, everything that appears on the site passes through my laptop. Yes, I edit every piece of content that HumbleDollar publishes. I don't necessarily agree 100% with every article by every writer. But I wouldn't allow an article to appear unless I thought it had something of value to say���and I certainly wouldn't publish anything if I thought its advice was wrongheaded.
Meanwhile, look for more pieces penned by me starting in June. Until then, enjoy the articles and blog posts by��HumbleDollar's other writers. Frankly, given their quality, I'm surprised I'm missed.
The post Missing in Action appeared first on HumbleDollar.
Paying Myself
During my final few years of work, I prepared by channeling most of my paycheck into both taxable and tax-deferred accounts. My pay was much higher than what I needed for living expenses.
As I���d religiously tracked my spending in Quicken, I could run reports of my historical outlays. I added what would become my single largest expense in the first decade of retirement���purchasing health insurance. I also reduced my budget for those costs I figured would go away in retirement, such as dry cleaning.
I built an Excel spreadsheet showing my total expected annual expenses. Next, I divided the annual total by 26 to see my biweekly spending needs. I wanted to track how closely my actual expenses matched my estimate.
Though interest rates are nowhere near as high as when I began investing in the late 1970s, I tried to earn as much interest as possible on my savings until I spent the money. Our taxable investment account was a money market fund at Fidelity Investments. I also opened a high-yield savings account with Synchrony, the online bank. Between the two, I kept enough cash for two years of expenses, plus an emergency fund.
Over the next 10 years, I moved money between Fidelity and Synchrony to catch the higher rate. For instance, during the pandemic, Fidelity���s money market rates dropped to 0.01%, while Synchrony���s high-yield savings rates stood at 0.5%. Neither was very satisfying, but I moved cash to Synchrony to earn the higher rate.
I���d also purchased certificates of deposit at each company, laddering them so one would mature every four months or so. When CD rates dropped to nothing during the pandemic, I still had several that paid 2% to 3%. As they matured, I didn���t buy new CDs because I didn���t want to lock in the low yields. Eventually, I began tapping retirement accounts to meet expenses, moving the money to the Fidelity money fund or Synchrony.
I keep my checking account at the local bank, replenished with transfers from Fidelity and Synchrony on the 15th and 30th of each month. I can transfer electronically between all three firms.
With each transfer to my checking account, I move enough cash to bring the balance up to a predetermined amount. Being somewhat meticulous, this transfer is to the penny. I might have a transfer of $2,321.47 if that���s what it takes to hit my desired target.
On each transfer date, I pay whatever bills have accumulated, and also enter anticipated electronic withdrawals into Quicken. My health insurance premiums and my utilities are due on the first of the month. I arranged for all my credit card bills to be due around the 15th to help balance my monthly spending.
Occasionally, I have earnings from consulting or some other onetime payment. Since these are deposited into my checking account, they allow me to lower my next biweekly withdrawal from savings.
Each year, I compare my total withdrawals to my investment balance. I want to see how my actual withdrawals compare to the magical 4% figure that many sources say is a sustainable withdrawal rate. I also revisit my annual expenditures in Quicken to see if I need to adjust the biweekly transfers to my checking account.
The Synchrony and Fidelity accounts are replenished with interest, dividends and mutual fund distributions. With inflation spiking, I expect CD rates to begin inching up. I���ve begun rebuilding my CD ladder at Synchrony whenever the bank offers a special rate. For instance, it was recently offering 1.15% on a 13-month CD.
All this juggling between accounts takes time, but I figure it adds $1,200 to $1,600 a year over what I could earn at my local bank. I do lose some of that to taxes, but every little bit helps. If nothing else, it pays for a month of health insurance.
Howard Rohleder, a former chief executive of a community hospital, retired early after more than 30 years in hospital administration. In retirement, he enjoys serving on several nonprofit boards, exploring walking paths with his wife Susan, and visiting their six grandchildren. A little-known fact: In May 1994, Howard was featured���along with five others���on the cover of Kiplinger���s Personal Finance for an article titled ���Secrets of My Investment Success.��� Check out his previous��articles.The post Paying Myself appeared first on HumbleDollar.
April 14, 2022
Coming Out Different
Her account���s custodian, instead of selling the stock and distributing cash, gave her the actual shares. This had never happened to her before, and she hadn���t requested it. Why did the custodian do it? She called to get an explanation and a rep claimed it was the ���company���s decision.��� Whatever that means.
Needing the cash, she directed the custodian to immediately sell the stock and send her the proceeds. The client was financially sophisticated and said she usually did her own tax returns. But the change confused her, which is why she came to AARP for help.
The three other seasoned tax preparers working that day had never heard of this kind of RMD before. I had heard it was possible to receive stock in lieu of cash, but had never seen it happen. A quick Google search cleared up the confusion and allowed us to prepare her tax return.
Receiving stock instead of cash is known as an in-kind distribution, and it happens occasionally with, say, trusts, when disbursing an estate, with employer stock in a 401(k), and���as our TaxAide client discovered���with IRAs. The federal tax code doesn���t include any specific rules about making in-kind distributions from an IRA. But the IRS instructions for generating a 1099-R form���which is issued when there���s an IRA distribution���provide the following guidance when filling out the form: ���If you distribute employer securities or other property, include in box 1 the FMV [fair market value] of the securities or other property on the date of distribution.���
The IRS won���t know if the distribution was in cash or securities. All it cares about is that those age 72 and older take a distribution from their retirement accounts that meets the required minimum amount.
Why would a retiree want an in-kind distribution from an IRA instead of a cash distribution? There���s no immediate tax benefit. But suppose you own a stock whose value is currently depressed and you���re confident it���ll bounce back. Conceivably, you might choose an in-kind distribution. That���ll move the shares into your regular taxable account, thereby saving you the cost and hassle of buying the stock. You might also opt for an in-kind distribution if, say, you own shares of a mutual fund that���s closed to new investors or for which you paid a sales commission.
If you opt for an in-kind distribution, it���s tough to know the precise value of the securities when the distribution is actually processed. If you want to receive a specific dollar amount, one strategy is to request slightly less than the RMD. You can then check the value of the RMD when you receive it. If it���s less than you���re required to take, you can request a cash distribution for the difference, thus ensuring you don���t get hit with tax penalties.
When you receive an in-kind distribution of securities in your taxable account, your cost basis is the value when the shares were distributed from the IRA, and the holding period starts anew on that date. If you then sell any of the shares in the first year, any gain since the distribution date will be taxed as a short-term gain. If you wait more than a year to sell, the lower long-term capital gains rate would apply.
Our client had the custodian sell the shares as soon as she could. She ended up with a $60 short-term capital gain. On her tax return, she reported the IRA distribution, as shown on the 1099-R form, plus the short-term gain based on the subsequent sale of the Exxon stock.
Richard Connor is��a semi-retired aerospace engineer with a keen interest in finance. He��enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter��@RConnor609��and check out his earlier articles.The post Coming Out Different appeared first on HumbleDollar.
Aversion to Income
How did we end up paying so little? It all started with my October 2020 layoff. I was age 57 and had, until then, enjoyed a 34-year newspaper career. One of my immediate concerns: getting health insurance coverage.
That turned out to be easy in 2021. Thanks to Affordable Care Act (a.k.a. Obamacare) sweeteners approved by Congress in response to the pandemic, my wife and I received a tax credit toward health insurance that ultimately totaled just over $1,600 a month. That covered 88% of our premium costs.
Because of the legislation, I and others who received even a week of unemployment benefits during 2021 got a special tax break: Our modified adjusted gross income (AGI) for purposes of Obamacare was considered to be 133% of the federal poverty level, rather than our actual modified AGI. That meant that, because I received unemployment benefits for three months last year, we could realize income without it reducing our Obamacare credit.
My wife and I took advantage by selling $80,000 in mutual fund shares in our taxable account. Our $58,856 in fund profits qualified for the 0% capital gains rate. That largely explains our tiny 2021 tax bill, despite a fairly hefty amount of income.
In 2022, our modified AGI matters again for me, but not my wife. She switched to Medicare last summer upon turning age 65. From here, we���re faced with a key decision: Do we sell investments to take advantage of our low income-tax bracket, or do we rely on our cash reserves, thus limiting our taxable income and thereby maximizing my Obamacare premium tax credit?
This year, I���m opting for the latter course. In re-enrolling in Obamacare, I estimated our 2022 income at $34,200. Most of that income is ���unavoidable.��� It includes my wife���s newspaper pension, her required minimum distributions from an inherited IRA, and our dividends and interest. My monthly premium is currently set at $114.40 after a tax credit of $744. The actual size of the tax credit will be determined next spring, when we file our 2022 federal tax return, which will include Premium Tax Credit Form 8962.
What if our income turns out to be higher than we expect? Each $10,000 increase in modified AGI between $30,000 and $70,000 reduces my credit by more than 10%. Result: While our marginal federal income-tax rate is likely to be only 10%, any additional income would effectively incur a rate that���s more than double that.
That gives me pause when weighing the common advice for someone in our position, which is either to sell winning investments in our taxable account to take advantage of the 0% capital gains rate���as we did in 2021���or to withdraw funds from traditional retirement accounts, perhaps converting them to a Roth.
Next year, the Obamacare sweeteners end. That means that, if our modified AGI exceeds 400% of the federal poverty level, I���ll be ineligible for a premium tax credit. For most two-person households, that threshold will be a modified AGI of $73,240.
My plan for this year and next year is to rely largely on cash to cover expenses, assuming I don���t land a job with health insurance. In my final working years, I had stockpiled cash in anticipation of a possible layoff. We also boosted the size of that cache with last year���s $80,000 mutual fund sale.
As for 2024 and beyond, I could stick with an Obamacare plan and accept that replenishing our cash coffer requires realizing extra income that would reduce my credit. Alternatively, I could switch to a low-cost, short-term individual plan for perhaps a single calendar year, allowing us to make significant portfolio sales without worrying that it���ll increase my premium. I could then switch back the following year, aiming to hold down our taxable income so I���d again get the benefit of the Obamacare premium tax credit.
Joe Kiefer volunteers regularly at his church in Ohio and at an adjoining food pantry, and he enjoys helping friends with personal-finance issues. After a career spent in newsrooms as a copy editor and reporter, he volunteers as an editor for a nonprofit organization and has been helping edit articles for HumbleDollar.The post Aversion to Income appeared first on HumbleDollar.
April 13, 2022
Get What’s Yours
Several years after we were married and while living in Illinois, my wife got a letter from the New York Secretary of State saying she may be the owner of an unclaimed savings account in the town where she was raised. This was before the internet. We had no idea how New York found her. Neither my wife nor her parents remembered the account. My wife filled out some paperwork and a few weeks later she received a check for a few hundred dollars.
Apparently, it���s common for people to forget about things like bank accounts, retirement accounts and utility deposits. Because states don���t want financial institutions and other companies sitting on this money, with no incentive to track down the owner, they require that unclaimed assets be turned over to the state. As a result, states hold billions of dollars in unclaimed property.
Today, thanks to the internet, searching for unclaimed assets is easy. Recently, I spent an evening checking for unclaimed assets in the six states in which my wife and I have lived. Using Google, I typed in the name of a state and ���unclaimed property.��� One of the first suggestions was always the official secretary of state site for unclaimed property. Most sites���though not all���had a ���.gov��� suffix, indicating it���s an official government website. Alternatively, you can locate official state sites by going to Unclaimed.org.
The sites varied slightly, but usually I could simply type in a name and then hit ���search.��� I used only my surname. If you also enter a first name, you may not find assets where the first name is listed only as an initial. I never knew there were so many folks called Sayler. It seems some of my very distant cousins are quite lax in keeping track of their financial assets.
On each site, it was easy to search for me, my spouse, our children, and even my parents and siblings. Maybe it reflects well on our family that I had just a single success. We found our son���s name, along with an address where he had previously lived. It said the amount the state had for him was less than $100.
We called our son and told him to go to that state���s site and type in his name. Claiming the money was easy. He simply entered his Social Security number and birth date. When those matched the state���s records, it asked for his current address. Larger amounts may require more documentation. Two weeks later, our son received a check���for $3.
The post Get What’s Yours appeared first on HumbleDollar.
April 12, 2022
Don’t Fall in Love
In the late 1960s and early 1970s, my father had a stockbroker friend through whom he bought shares, mostly in blue-chip drug companies that he admired. At various times, he owned Bristol Myers, Glaxo, Pfizer and Schering-Plough. But he always held an outsized position in his beloved stock, Merck.
After 30 years of dentistry and before turning age 60, he gave up fulltime practice to move to Vermont, where he had a second home. Around this time���in the mid-1990s���my father told me that, to his shock, his brokerage account had just hit the magic $1 million number. He never dreamed he���d see that figure, which���to him���meant security for the rest of his life.
I don���t take joy in killing a party mood. But the CPA in me had to ask him if he was prudently diversified. He said about 75% or more of his assets were in Merck shares. Even if he wanted to diversify, he said, he couldn���t sell because he didn���t know his cost basis. Besides, he had no interest in paying capital gains taxes.
My father rode Merck���s precipitous stock rise to glory. He retired earlier than all of his friends, and enjoyed his newfound freedom in the hills of Vermont. But he wasn���t alone in his good fortune.
One of my dad���s best friends, Bob, was a successful attorney. His portfolio also was heavily skewed to one blue-chip favorite, General Electric. I���ll never forget one warm summer day when the three of us were chatting. The drinks were flowing, we were all glowing from a day of boating and the stock market was ripping.
Dad and Bob���a.k.a. Merck and GE���started talking about the stock market. I was a newly minted CPA. I was married with two small kids and had just taken on the role of CFO of an investment advisory firm. When they asked me what I liked to invest in, you should have seen their faces when I told them I loved broad-based index funds.
I was a John Bogle disciple and had read his book Common Sense on Mutual Funds. I���d also read William Bernstein���s The Four Pillars of Investing, another book that waves the flag for index investing. I can only imagine what went through their heads when they heard me talk. I���m sure they chalked it up to being young and clueless. I definitely recall being told that I was on a path to average, which they insisted was a life of mediocrity.
I had many conversations with my father about his use of margin and his love of options trading. I���d talk about diversification and warn him that a single stock is fraught with risks. I tried to explain that the risk he was running was greater than its potential reward.
I explained that the capitalization-weighted index funds I favored were heavily invested in exceptional winners. Meanwhile, most publicly traded stocks don���t perform as well as Treasurys over the long haul, and so get little or no weighting. I also noted that the Nifty Fifty growth stocks from the 1960s���such as Eastman Kodak, Digital Equipment, JC Penney, Polaroid and Sears���later often went bankrupt, defunct or were merged out of existence.
What happened to Merck and GE, and to Dad and Bob? Between 1985 and 2000, Merck stock soared more than 3,500%. In the following decade, however, while Dad was retired, Merck���s price collapsed. One of its top-selling drugs lost patent exclusivity in 2000 and 2001. Even worse, Merck had to withdraw its blockbuster arthritis drug Vioxx from the market in 2001 after studies found that the drug doubled the risk of heart attacks and strokes in long-term users.
Merck stock fell 27% on the day of the Vioxx announcement. It eventually bounced back after acquiring Schering-Plough, but it took years. By that time, my father had been forced to sell shares to keep food on the table. His portfolio was crushed and, in many ways, so was he.
This dark period for him was marked by increased drinking and thoughts of suicide. He eventually became financially dependent on me, his son, in his 70s. I���d call that a parent���s worst nightmare.
What about Bob and GE? When Bob was all-in on GE, it was run by legendary CEO Jack Welch. Welch, a former chemical engineer, orchestrated the acquisition of RCA, NBC and expanded GE into financial services. The stock price rose 40-fold under his tenure. During the dot-com crash of 2000, however, GE shares nosedived. Welch retired on Sept. 7, 2001.
Under his successor, Jeff Immelt, GE���s stock price stabilized somewhat. But then, in 2008, the financial crisis hit GE hard. Shares fell 42% that year when it became clear that GE was overstretched. Warren Buffett stepped in with funds to stabilize GE���s operations, and the company also received $139 billion in government loan guarantees. But its troubles didn���t end with the financial crisis.
After years of decline, GE was removed from the Dow Jones Industrial Average in June 2018. I heard bits and pieces about Dad���s friend Bob. I know his retirement didn���t happen as planned, and that he worked well into his 70s. He was forced to sell real estate holdings that he otherwise would have kept.
I write not to brag about my foresight but to offer a lesson. Investing is strange. The smartest people don���t necessarily make the best investors. The best investors may not be the ones who pore over the financials and understand the minutiae of complex drugs, complex systems or complex corporations. Human behaviors���like overconfidence in your judgment or confusing skill with luck���play an outsized role. That���s why behavioral finance has become such a popular field of study.
Warren Buffett���s edge is that he never has to sell. His favorite holding period is forever. We can���t all be like Buffett, but we can learn from the mistakes that far too many investors make.
As for myself, I���ve never deviated in my ways. My portfolio of several decades consists largely of broad-based stock index funds. Like my father, I don���t want to sell because my cost basis is so low. But unlike my father, I don���t have to.
Andrew Small was the CFO of Archstone Partnerships from 1994 to 2019. Archstone returned its capital to its investors, leaving Andrew with more time to spend road cycling, learning to draw and paint, traveling and spending time with his family. His pet portraits and other paintings can be found at
www.AndySmallArt.com
.The post Don’t Fall in Love appeared first on HumbleDollar.
