Jonathan Clements's Blog, page 225

Spending Time

AFTER 78 YEARS, my plumbing has gone awry, and I���m not talking about the kitchen sink. My doctor said something about my prostate having its own zip code. I���m waiting to have surgery and, because of fear of COVID, I���ve been quarantined for the past month.

We were supposed to be in Florida. For several years, we had rented a house using VRBO. Luckily, I was able to cancel within a week of our reservation date with no hassle. I received a full $10,000 refund within three days.

I���ve confirmed that Medicare works. I chose my own doctor and, thanks to my Medigap plan, my bills will be limited to the Part B deductible. Even my prescriptions���more in the last month than in my entire life combined���cost me copayments of $5.42, $14.28, $18 and $0. The fact is, despite the outliers we hear about, the great majority of the most commonly��used medications are affordable. In checking the possible side effects of one prescription, I discovered unanticipated benefits. It causes hair to grow on your head and reduces the desire for alcohol. Unfortunately, I don���t seem to be prone to either side effect���at least not yet.

My confinement has led to boredom. My motivation to do much of anything has waned. I���m watching more TV than ever before. Did you know you can still watch Laurel and Hardy and Ozzie and Harriet?

I���ve also learned how easy it is to shop online. I used to be amazed at the number of packages arriving daily for an elderly lady in our building. Now, I understand. Online shopping is addictive, especially when you���re bored or lonely.

I started by innocently exploring a few things on Amazon. Just necessities, don���t you know. Then I was duped by Facebook ads. The Irish sausages looked interesting. I���m always up for bangers and mash, as well as white pudding. I moved on to a site for assorted snacks, candy and pretzels. Then there���s the ice cream. What a selection. Luckily, I was saved because there���s no room in our freezer, otherwise it would have been filled with butter pecan and mint chocolate chip. Charles Chips brought back memories, too. We used to buy them off the company���s truck. Now you buy them online.

Even shopping for regular groceries can get out of hand. Just search and click, no aisles to walk. They say you���re prone to buy more if you shop while hungry. Imagine you���re hungry���and bored. Did I need those bags of popcorn, the raspberry ice tea or that can of corned beef hash? Hey, I ordered organic celery, too.

I claim to have a modicum of frugality. That seems to have fallen by the wayside.

Oh my, what can happen when you have time on your hands. It���s so easy, choose your purchase, add your credit card info and check out. It���s like EZ-Pass. Who pays tolls? You just drive through the toll booth. It���s all free���at least until the end of the month.

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My Uncle’s Advice

I LEARNED A LOT about finance and life from my uncle. He was an early investment advisor and published a book on wealth management. Even though he was not a registered investment advisor or a Certified Financial Planner, our family proudly extolled his ideas when I was growing up.

My family first introduced me to my uncle���s doctrines when I was a child of five or six. I had been given a small piggybank to store my life���s savings. We soon added a couple of mason jars because I had begun collecting wheat pennies with my small allowance.

Production of wheat pennies had ended three years earlier, in 1958, which led me to think they would become collectibles. I even favored older pennies since they might provide greater long-term value. Little did I know that as many as a billion pennies had been minted each year.

My Depression-era parents were quite supportive of my slowly filling penny jars. Along this savings journey, they also introduced my uncle���s advice through both everyday practice and some preaching.

I vividly remember wanting a Yogi Bear gun, hat, holster and badge set, which was on display at our local five-and-dime. Every time we left the store, I begged my parents to buy it. They initially said a simple ���no,��� and I let it pass. In those days, my family couldn���t afford much of anything on a whim.

One day, my parents relented and agreed that I would be allowed to buy the set, but said I would have to pay the 99 cents from my coin jars. The 99 cents represented perhaps 20% of my life���s savings. I threw a hissy fit as only a young child can. ���Not with my own money!��� I screamed.

I passed on the set, and we never did buy it. This story has been repeated so often it���s now part of family lore. My parents used the same tactic many times. For example, I remember regularly wanting a 10-cent ice cream cone from the daily summer runs of the Good Humor truck���but again didn���t bite when my parents insisted that I part with some of my own money.

Some time after the Yogi Bear incident, my parents talked to me about the concept that ���a penny saved is a penny earned.��� They were happy that I didn���t spend my savings on an unneeded toy since, in their view, I had many other things to play with. They also introduced me to the story of our famous ���uncle.���

You see, my uncle was Uncle Ben���of Ben Franklin fame. He was indeed a relative, though by marriage, so I���m not a direct blood descendant. Still, my Philadelphia-based family regularly discussed Ben���s history and touted his words of wisdom. Uncle Ben was a founding father and inventor of the lightning rod, bifocals and the Franklin stove, which produced more heat with less smoke. As a teen, I read biographies about him, and he was my go-to subject for history and science papers.

More important, Uncle Ben was a prolific writer who promoted simple, positive philosophical principles about finance and life. In 1758, he wrote one of the earliest books on personal finance called The Way to Wealth. This short booklet was an essay compiling 25 years of maxims from his Poor Richard���s Almanack .



As a lifelong penny-pincher, I have followed his mantra that a penny saved is a penny earned. Actually, Uncle Ben���s original 1737 words were ���A penny saved is two pence clear,��� which he revised in 1758 to "A penny saved is a penny got,��� closer to today���s modified version of his quotation.

Franklin was by no means perfect, especially when judged by today���s standards. Still, Uncle Ben left a legacy of proverbs that are as relevant today as they were when he coined them more than 250 years ago. Many of his more than 700 maxims are familiar and still widely quoted. Here are 16 that are among Uncle Ben���s best:

���The way to wealth���depends chiefly on two words, industry and frugality: that is, waste neither time nor money, but make the best use of both.���
���Money is of a prolific generating nature. Money can beget money, and its offspring can beget more.���
"Beware of little expenses. A small leak will sink a great ship."
���When you run in debt, you give to another power over your liberty.���
���If you would be wealthy, think of saving as well as of getting.���
���Money has never made man happy, nor will it, there is nothing in its nature to produce happiness. The more of it one has, the more one wants.���
���An investment in knowledge always pays the best interest.���
���Lost time is never found again.���
"By failing to prepare, you are preparing to fail."
"Do not squander time, for that is the stuff life is made of."
���Stick to it steadily, and you will see great effects.���
���There are no gains without pains.���
���Haste makes waste.���
���Diligence is the mother of good luck.���
"Have you somewhat to do tomorrow, do it today."
���In this world nothing can be said to be certain, except death and taxes.���

John��Yeigh��is an author, speaker, coach, youth sports advocate and businessman with more than 30 years of publishing experience in the sports, finance and scientific fields. His book "Win the Youth Sports Game" was published in 2021. John retired in 2017 from the oil industry, where he negotiated financial details for multi-billion-dollar international projects. Check out his earlier articles.

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Drawdown Drawbacks

LOTS OF RESEARCH has been done on the best way to generate retirement income. It���s one of the most popular topics on HumbleDollar. I think this popularity is driven by two things: its obvious importance���and the fact that there���s no one right answer.

By contrast, figuring out how much we need to save for retirement is relatively easy. It isn���t hard to pick a future retirement date, or at least a range of years during which we���ll likely retire, and then figure out how much we ought to be saving. But when it comes to generating retirement income, none of us knows how long we will live, what markets will do or what our health care needs will be. There are also subjective questions, like how much do we want to leave to our heirs?

Last November, Morningstar released a report analyzing a variety of methods to determine a retiree���s safe portfolio withdrawal rate. At 59 pages, it���s quite extensive, but well worth the read. It analyzes several withdrawal strategies, provides pros and cons for each, and ends with a process to develop an individual retirement income plan.

One of the options it considered is the so-called RMD withdrawal strategy. Under this plan, annual withdrawals are based on your portfolio���s previous year-end balance. You withdraw a percentage of your portfolio consistent with the required minimum distribution (RMD) guidelines provided by the IRS life expectancy tables. Under this scheme, your income would rise or fall as your portfolio���s value changes.

The online financial planning magazine ThinkAdvisor recently asked three retirement planning experts for��their views of the RMD withdrawal strategy versus the better-known 4% rule. Under the 4% rule, you withdraw 4% of your portfolio in year one, and then increase that amount by inflation in year two and subsequent years. The 4% rule has been criticized for a host of reasons. Some say 4% is too high given today���s low bond yields and high stock valuations. Others say the strategy is too robotic in the face of plunging financial markets.

Michael Finke, a professor at the American College of Financial Services, doesn���t like the possible income shock of the RMD approach. If a retiree is heavily invested in stocks, a serious down year could slash her income the following year.

"A better retirement plan evaluates how much of the budget is flexible and how much is inflexible,��� Finke said. ���Then build an investment plan that doesn���t expose inflexible spending to either market or longevity risk.��� Finke said his experience shows that about two-thirds of retirees��� expenses are fixed. The RMD strategy might work for just the subset of the portfolio devoted to flexible spending, because the strategy tends to deliver fluctuating amounts of income, Finke argued.

By contrast, David Blanchett, former head of retirement research at Morningstar, likes the RMD approach because it ties withdrawals to a retiree���s age. He recommends that retirees get a realistic estimate of their longevity, however, rather than just relying on the IRS tables.



Blanchett gave this example: If you estimate your life expectancy as 20 years, you could start with a 5% withdrawal rate. If you have 25 years left, then a 4% withdrawal rate is more appropriate. What if you���d previously been withdrawing 8%? The RMD strategy delivers a wakeup call that you need to cut back.

Christine Benz, director of personal finance at Morningstar, said the RMD method is efficient at ���helping to ensure that a retiree spends most of his or her money.��� But she said the method is ���not very livable��� because it can deliver extreme fluctuations in income to retirees with higher stock allocations.

Another concern Benz raised: The RMD life expectancy tables are based on average life expectancies. Retirees with longer-than-average lifespans run the risk of running out of money. Also, their balance might dwindle when they���re elderly���just when they may face huge expenses for medical or custodial care.

In short, three of the leading voices in retirement planning gave three different assessments of the RMD strategy. I find this same kind of disparity among my friends, family and colleagues. We each look at the retirement income question through our own lens.

For example, some might take modest withdrawals so they have plenty left to meet high medical costs late in life. Others might hope for the best and spend more freely. Yet others choose to live frugally throughout retirement, in hopes of leaving the maximum amount to their kids.

Each of us must answer questions like these for ourselves and plan accordingly. Figuring out what���s most important to you and your spouse is essential. Many people���s views are based on their experiences with their parents and family. This is useful and should be a part of the analysis. But we should also be open to new ideas. Retirement income planning is such a complex subject that we can all benefit from hearing what others think.

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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I Won’t Be Selling

I TELL MY CHILDREN that they can’t possibly fathom the amount of information that they have in their hands. I’m part of the last generation—so-called Gen X, those born between 1965 and 1980—who actually had to trudge down to the library and pray it had the information we needed. Today, the internet provides it all in seconds.

I needed to change a leaking bathtub faucet. I’m not qualified to be a plumber. But I looked up a few YouTube videos and, within a day and to my wife's delight, I had changed the faucet. There were at least 20 videos I could have perused and probably 100 articles from a Google search that were relevant.

Sometimes, however, the amount of information available is totally irrelevant to the task at hand. Want to learn how to ride a bike? You can look up every internet article and watch every YouTube video, but until you’ve fallen, scraped a knee, hurt your wrist or crashed into a tree (guilty), you don’t really know how to ride a bike.

The same is true for investing. You can read every Warren Buffett shareholder letter, John Bogle quote and Peter Lynch story, but until you’ve suffered a large drawdown, you have no idea how you’re going to react when the investment bullets start flying and the hedge-fund bots start selling en masse. As market technician Walter Deemer likes to say on Twitter, “When it's time to buy, you won’t want to.” Objective data showing markets eventually recover and go on to new highs can’t compete with our emotional gyrations.

For me, that experience first came amid the Great Financial Crisis of 2008-09. During the earlier 2000-02 dot-com crash, I was young, dumb and thought money was for buying drinks and pizza. In 2008, however, I was married with two young children, a mortgage, and a career that was still trying to find direction. I had real money and dependents. I watched all my individual stocks blow up. It was then that I decided to go all-in on target-date funds and call it a day. I never sold any of my target-date shares. For my individual stocks, I didn’t need to—because those companies had declared bankruptcy.

I don’t remember all the details of 2008-09, but I distinctly remember the feeling. I was filled with dread. Financial markets were dead. A new depression was starting. The Federal Reserve had printed money like never before. I was lucky to have a job. The “new normal” (I despise that phrase to this day) was 1% to 2% stock returns. The ghost of 1970s inflation was coming back at any moment. The end of the American empire, with its foolish derivative financial instruments of mass destruction, was at hand.

As the saying goes, the best thing to do when you’re in hell is to keep walking, so I just kept working, raising my children and investing to the max in my 401(k). I don’t think I ever looked at our investment statements until the end of the year. Why bother with 1% to 2% expected returns? At the end of 2017, I noticed something odd. Our financial assets in the era of the “new normal” had actually quintupled. We were paper millionaires. I excitedly showed my wife. She blinked, and asked me to take out the trash and to try to get a stain off the ceiling of our minivan.

Fast forward to March 2020: I am again filled with dread. The world’s population, not just financial markets, was actually dying. A new depression was starting as the globe literally shut down business. In the months ahead, the Fed would print money like never before and Congress would inject trillions in stimulus. I was lucky to have a work-from-home job.

The new normal is 1% to 2% stock returns, we were again told. What did I do? Nothing. I’d been here before. I remember the knot in my stomach. I remember the headlines, down to the new normal. I didn’t need to see it on YouTube or read about it in The Wall Street Journal. I had lived it before and had the emotional scars to show for it. I knew how to ride a bike.

Today’s headlines are of a horrific invasion of Ukraine, a bear market in highflying Nasdaq stocks, raging inflation, a market superbubble and a correction in the S&P 500. It could get worse with mid-term election madness.

I won’t be selling, but rather buying. Why? I’ve lived this movie before, and I’ll probably live it again and again and again. The only thing for me to do is to take out the trash and, this time, vacuum my Subaru.

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I Won���t Be Selling

I TELL MY CHILDREN that they can���t possibly fathom the amount of information that they have in their hands. I���m part of the last generation���so-called Gen X, those born between 1965 and 1980���who actually had to trudge down to the library and pray it had the information we needed. Today, the internet provides it all in seconds.

I needed to change a leaking bathtub faucet. I���m not qualified to be a plumber. But I looked up a few YouTube videos and, within a day and to my wife's delight, I had changed the faucet. There were at least 20 videos I could have perused and probably 100 articles from a Google search that were relevant.

Sometimes, however, the amount of information available is totally irrelevant to the task at hand. Want to learn how to ride a bike? You can look up every internet article and watch every YouTube video, but until you���ve fallen, scraped a knee, hurt your wrist or crashed into a tree (guilty), you don���t really know how to ride a bike.

The same is true for investing. You can read every Warren Buffett shareholder letter, John Bogle quote and Peter Lynch story, but until you���ve suffered a large drawdown, you have no idea how you���re going to react when the investment bullets start flying and the hedge-fund bots start selling en masse. As market technician Walter Deemer likes to say on Twitter, ���When it's time to buy, you won���t want to.��� Objective data showing markets eventually recover and go on to new highs can���t compete with our emotional gyrations.

For me, that experience first came amid the Great Financial Crisis of 2008-09. During the earlier 2000-02 dot-com crash, I was young, dumb and thought money was for buying drinks and pizza. In 2008, however, I was married with two young children, a mortgage, and a career that was still trying to find direction. I had real money and dependents. I watched all my individual stocks blow up. It was then that I decided to go all-in on target-date funds and call it a day. I never sold any of my target-date shares. For my individual stocks, I didn���t need to���because those companies had declared bankruptcy.

I don���t remember all the details of 2008-09, but I distinctly remember the feeling. I was filled with dread. Financial markets were dead. A new depression was starting. The Federal Reserve had printed money like never before. I was lucky to have a job. The ���new normal��� (I despise that phrase to this day) was 1% to 2% stock returns. The ghost of 1970s inflation was coming back at any moment. The end of the American empire, with its foolish derivative financial instruments of mass destruction, was at hand.

As the saying goes, the best thing to do when you���re in hell is to keep walking, so I just kept working, raising my children and investing to the max in my 401(k). I don���t think I ever looked at our investment statements until the end of the year. Why bother with 1% to 2% expected returns? At the end of 2017, I noticed something odd. Our financial assets in the era of the ���new normal��� had actually quintupled. We were paper millionaires. I excitedly showed my wife. She blinked, and asked me to take out the trash and to try to get a stain off the ceiling of our minivan.

Fast forward to March 2020: I am again filled with dread. The world���s population, not just financial markets, was actually dying. A new depression was starting as the globe literally shut down business. In the months ahead, the Fed would print money like never before and Congress would inject trillions in stimulus. I was lucky to have a work-from-home job.

The new normal is 1% to 2% stock returns, we were again told. What did I do? Nothing. I���d been here before. I remember the knot in my stomach. I remember the headlines, down to the new normal. I didn���t need to see it on YouTube or read about it in The Wall Street Journal. I had lived it before and had the emotional scars to show for it. I knew how to ride a bike.

Today���s headlines are of a horrific invasion of Ukraine, a bear market in highflying Nasdaq stocks, raging inflation, a market superbubble��and a correction in the S&P 500. It could get worse with mid-term election madness.

I won���t be selling, but rather buying. Why? I���ve lived this movie before, and I���ll probably live it again and again and again. The only thing for me to do is to take out the trash and, this time, vacuum my Subaru.

The post I Won���t Be Selling appeared first on HumbleDollar.

Gifts With Interest

FOR 10 YEARS, my wife and I have given each of our four children $5,000 to $6,000 per year for them to put in their respective Roth IRAs. So far, we have given each of them about $60,000.

They were amazed a few years ago when their investment gains for that year exceeded our annual contribution. Today, their Roth accounts are now each worth about $125,000, so their cumulative growth���about $65,000���now exceeds our total contributions.

We began in March 2012, when our four kids ranged in age from 23 to 31. We gave each of them $5,000, which was categorized as a 2011 IRA contribution. That December, and each subsequent fall, we gave them another $5,000 to $6,000, depending on IRA contribution limits. From the start, the money has been 100% invested in total stock market index funds.

We love our children. They���re great kids���caring, hard-working, creative. But 10 years ago, none had a high-paying job. They weren���t interested in financial matters, probably because they had little money. In the beginning, my wife and I told ourselves we would give them money for at least three years.

Legally, once the money is in our kids��� accounts, it���s theirs. They can do what they want with it. My wife and I view it as their retirement funds, however. To receive our contributions, they must allow us to view their accounts online. We're very clear. If they withdraw money early, they'll get no more deposits from us.

We set up these Roth IRA accounts at Vanguard Group, where we had our investments. I did most of the setup work, although our kids did have to complete some paperwork. Recently, we moved our accounts, and our kids��� accounts, to Schwab. At either place, the annual transfers have been easy. We simply transfer money from our accounts to our kids��� accounts.

We have had two major bumps along the road:

Lack of earned income. People can put money into a Roth IRA only to the extent that they or their spouse have earned income. Two of our children have had years with no earned income. For those years, we opened a non-IRA account in their name and put the money in that. Of course, this money does not grow tax-free.
One of our children is facing divorce. We realize that half of their IRA may go to that child���s soon-to-be ex-spouse. We���re okay with that. We like that person and we are sorry for their divorce.

By making contributions, we hope our kids will learn something about investing and the financial markets. I especially hope they embrace two crucial lessons.

First, U.S. stocks are a good place to invest in the long run. I don���t know what will happen during the next 60 years, but I hope the U.S. stock market will continue to be a good place to invest during our children���s lifetimes.



Second, during a market drop, they shouldn���t panic and sell everything. There has been only one year, 2018, in which their accounts have shown a loss, and that was a loss of just 8%. I wish we had a few years with greater losses. I want them to realize that, for a long-term investor, a significant loss is not a time to panic.

My wife and I plan to continue contributions indefinitely. In another 10 years, with additional annual contributions and reasonable growth, their accounts should be worth $250,000 each. If my wife and I are fortunate enough to be alive 20 years from now, their accounts might be worth $500,000 each. That will be $2 million that otherwise would have been in our estate.

I���m concerned about estate taxes. For 2022, federal estate taxes do not kick in unless a person���s estate is more than $12 million. We are well below that amount. In 2026, if Congress does nothing, the threshold will drop to about $5 million. But Congress can change this exemption amount at any time. We would much rather give our money to our children and charities than to the federal government.

Each year for Christmas, we give our children a nice card with a letter and a spreadsheet. The spreadsheet shows, for each year since we began the program, their beginning-of-year balance, our contributions, their investment gains or losses, and the end-of-year balance. I want them to see the big picture of the progress their account has made.

My wife and I can do this for our kids because we have accumulated a nice nest egg. We are not wealthy, but our needs are modest. Our portfolio continues to grow, and we are withdrawing just 2% to 3% each year. We use withdrawals for these transfers to our kids and for the taxes associated with some significant IRA conversions that we���ve been making in recent years. Otherwise, we pretty much live on just Social Security and a small pension.

There���s a saying that, ���The best time to plant a tree was 20 years ago. The second best time is now.��� Perhaps we should have started this program earlier. We���re glad we didn���t wait any longer.

Larry Sayler is the only person with a Wharton MBA who also graduated from Ringling Bros. and Barnum & Bailey���s Clown College. Earlier in his career, he served as CFO for three manufacturing and service organizations. For 17 years before his retirement, Larry taught accounting at a small Christian college in the Midwest. His brother Kenyon also writes for HumbleDollar. Larry's previous article was Making a��Difference.

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Fight That Bias

FOREIGN STOCKS suffered big losses last week. Vanguard FTSE Developed Markets ETF (symbol: VEA) dropped 6.2% as fears about Russia���s aggression came to a head. Losses were most sharp in Europe���iShares MSCI Eurozone ETF (EZU) plunged 13.3%. For the year, the U.S. stock market is now slightly ahead of international stocks.

Investors often question whether they should own non-U.S. stocks. The common logic���flawed in my opinion���is that domestic firms offer enough foreign exposure because many are multinational businesses. What���s the problem with this argument? It lies with the performance data.

If it didn���t matter whether you held all U.S. or all non-U.S. stocks, you���d expect similar performance from both. In fact, return numbers show they take turns outperforming. That���s a great thing for investors who want the reduced portfolio volatility that comes with broad diversification.

Trouble is, it also creates a huge risk. Investors are all too human and tend to succumb to recency bias, leading them to own too much of whatever has recently performed best. Even without such performance-chasing, many U.S. investors already have a high allocation to domestic stocks due to their home bias.

For now, I won���t get on my soapbox, urging folks to diversify internationally. Instead, let���s see why returns continue to be so different for U.S. and overseas markets.

It���s sometimes thought that currency gyrations drive the diverging returns. There are even funds that hedge foreign-exchange risks, though those hedges come with an added cost. But it seems currency plays a somewhat small role in the performance differential between U.S. and foreign stocks.

Take last year. The U.S. stock market returned 26%, while international markets were up just 8%. The dollar, up a robust 6%, accounted for less than half of the performance gap. Something else was going on.

What was it? The U.S. market has a high weight to the technology sector���28%. Lump in giant stocks like Google (Alphabet), Amazon, Tesla and Facebook (Meta Platforms), and tech is upwards of 40% of the S&P 500. Contrast that to foreign markets, which are just 12% weighted to technology shares. That difference plays a key role in driving performance differences.

The U.S. stock market has returned a strong 301% since May 2008. Foreign shares are up a measly 36% in that time, including dividends. What about the greenback? It���s higher by just 37%. The real drivers of the performance spread between domestic and international indexes are sector differences. Tech stocks are up an incredible 650% over that span. Energy shares, by contrast, returned only 29%. International indexes have historically had a much higher weight in energy.

Further mucking up the analysis are valuation��changes. Over the past 15 years, investors bid up growth sectors much more than value and cyclical sectors. That, too, has benefited the U.S. stock market.

My contention: Owning a portfolio of both domestic and foreign index funds, and then periodically rebalancing, makes sense. The two segments go through periods during which one beats the pants off the other. Rather than getting cute and trying to time these inflections, it���s wiser and less stressful to simply own both.

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Stock Answers

I REALLY WISH THERE was a topic to discuss today other than the grotesque war being perpetrated against Ukraine. But unfortunately, there isn���t. This situation has prompted numerous questions from investors. Below are the three questions I���ve heard most over the past week.




1. What���s the financial impact of these events? Since Russia invaded Ukraine, global stock markets have bounced around with no discernable pattern (other than the Russian market, which has���not surprisingly���been a��disaster). This reflects several realities. The first is that the economic impact is still very much an open question. Because no one knows when or how this crisis will be resolved, it���s difficult right now to estimate the net impact on the world economy.




In the meantime, though, the market is doing its best���however imperfectly���to gauge the impact. So far, investors have, on average, concluded that the impact may be minimal. According to FactSet, companies in the S&P 500��derive��just 1% of their revenue from Russia and Ukraine. Circulating online last week was a��video��of a Russian man angrily smashing his iPad���a proxy, I assume, for his anger at Apple for��suspending��sales in Russia. That made for good theater.




But the economic reality is that Russia, while large geographically, has a surprisingly small economy. It���s less than one-tenth the size of the U.S. economy. It���s largely irrelevant as an export market for American companies. That���s one key reason the U.S. stock market has barely registered these events. Sometimes, the market overreacts���as it did in the��early days��of the pandemic���but sometimes it does react proportionally, and that���s what we���re seeing in this case.




A second reality, as some have grimly noted: War isn���t necessarily bad for the economy. Companies like Apple might lose sales, but others will gain. Unfortunately, defense contractors will probably have a good year. Energy companies, which were already having a good year, will likely see profits improve further due to rising oil prices. According to Bank of America, commodity prices have already risen at a faster rate this year than in any year since 1915. The bottom line: As things stand now, the financial impact of Russia���s war is unclear, but the best estimate is that, on balance, it may be insignificant.




Another reason why the market reaction, so far, has been muted: Markets are politically agnostic. What���s going on in Ukraine is a humanitarian crisis and an assault on democracy. It���s terrible. But it isn���t currently an economic crisis. In some ways, the market���s reaction to this crisis mirrors what we saw in 2021: Despite an ongoing health crisis, the market rallied to new highs. Many found that puzzling and perhaps troubling. Similarly, when a country is being senselessly leveled, it seems like markets ought to react. But for better or worse, the market is sometimes quite unemotional.




2. Even if the financial impact today is muted, could there be an economic impact over the long term? This question is harder to answer because we don���t know what the resolution of this conflict will look like. Still, it���s worth exploring the potential impact and the range of possibilities.




The clearest risk is to consumer prices. Before this started, inflation was already a problem, and it could get worse. That���s because Russia and Ukraine produce several key commodities. Ukraine produces significant amounts of wheat and corn, while Russia is a major oil producer. If Ukraine is in ruin and Russia is isolated economically, prices for these commodities could see further increases.




Russia only accounts for a��small portion���less than 10%���of U.S. oil imports. But it���s a much more important source of energy for western Europe. Because commodities are fungible, a supply constraint in one market tends to drive up prices everywhere as consumers scratch around for other sources.






While commodity prices pose the clearest risk, inflation could spread more broadly throughout the economy if Russia chose to escalate and expand its aggression. That���s because global supply chains are already snarled, and a broader international conflict could make transportation that much more difficult. Depending on which way things go, it could also cause a recession.




China is another piece of the puzzle. In recent years, under Xi Jinping, China���s posture toward the world���and the West, in particular���has become increasingly hostile. An especially troubling example: There was��news��this week that Putin had consulted with Xi about his plans for Ukraine, and that Xi���rather than trying to dissuade a madman from embarking on an unprovoked war���had instead simply requested that he wait until the Olympics in China had concluded. If true, that tells us a lot about Xi and significantly raises the overall risk to the U.S. economy. It���s rare that we see a product stamped ���Made in Russia,��� so it���s fairly painless to isolate Russia economically. It would be far harder to isolate China in the same way. If Xi chose to borrow from the Putin playbook, we���d have a far bigger economic problem.




3. Going forward, should I do anything differently? The most important thing for investors to do today is the same thing that���s always been most important: to diversify. As the pandemic and this crisis both illustrate, risks can come out of nowhere and at any time. Diversification means that you���ll rarely have the top-performing portfolio among investors, but it also means you���ll rarely have the worst performance.




What else can you do? In recent years, there���s been growing interest in socially responsible investing���that is, structuring portfolios to reflect an investor���s values. A common acronym is ESG���short for environmental, social and governance, which are three important criteria for scoring public companies��� conduct. Some people choose to structure their portfolios in line with their values purely because that���s what���s important to them. Others believe that investing in good companies will actually produce better investment returns���because companies that are run in a principled way will tend to have happier, more productive workers and will also get into less trouble.




Usually, ESG is applied on a stock-by-stock or industry-by-industry basis. But as you look at the geographical distribution of your portfolio, you might apply a similar lens. Is Vladimir Putin someone you would want to do business with? How about Xi Jinping? If not, then it may be worth asking whether you want any of your investment dollars in their domains.




In the portfolios that I manage, I typically allocate only 5% of stocks to emerging markets. Of that 5%, China accounts for about 30%, while Russia accounts for just 2% or 3%. In the past, I���ve felt that���s a reasonable risk level. But in light of recent events, this is something to reconsider. By some measures, Russian stocks are down��90% or more. It���s tough to say right now because its market has been closed, and it���s being��kicked out��of the primary emerging markets index.




Is now the right time to exit emerging markets? In general, I don���t like investing based on the rearview mirror. That���s called performance chasing, and it���s a good way to suffer whiplash. That���s why I generally recommend setting an asset allocation and maintaining it through thick and thin. But that doesn���t mean change is never warranted.




When British economist John Maynard Keynes was criticized for changing his mind on a public policy question, he is said to have responded, ���When the facts change, I change my mind.��� Unfortunately, when it comes to Russia���and the risk posed by emerging markets in general���it���s hard to argue that the facts haven���t changed.




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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Things to Experience

BEHAVIORAL ECONOMISTS tell us that we���ll get more satisfaction if we spend our dollars on experiences rather than on purchasing possessions. But what if the purchase allows us to have an experience? Buying a bike, for instance, allows me to take a ride with my sons.

That raises the question: How much do we need to spend on equipment to get the maximum benefit from an experience? I got a glimpse of the answer to that question several years ago as I was walking out of the office on a Friday.

The company���s lab director was leaving a little early, as was I. We talked a bit about our weekend plans. He and his wife were heading to Minnesota���s Boundary Waters for a weekend of canoeing. I was taking my sons and a group of Boy Scouts canoeing in a similar area.

It struck me that the lab director was transporting his Kevlar canoe using his new Lexus, while I was taking a factory seconds rotomolded canoe on top of my 10-year-old Chevy. But we would both be sleeping under the exact same summer sky. We would each hear the laugh of loons on the lake in the morning. We would each enjoy the company of our companions.

To have an experience, there���s some sum of money that needs to be spent on things. But once the basics are covered, there���s sharply diminishing returns on the additional dollars spent.

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My Experiments

I WAS BORN at Carswell Air Force Base in Fort Worth, Texas, to a Canadian mother and a father who was raised in a Catholic orphanage. My mother and father both had civil service jobs. I was fortunate that my father was, by then, retired from the military, so I never had to move while growing up. I benefited from a stable home life, loving parents and good public education.

In high school, my only brush with business was taking four semesters of bookkeeping���a head start for accounting classes. My father taught me how to play tennis and I made our high school team in the Jimmy Connors-Bjorn Borg era. My high school minimum-wage jobs were as a dishwasher in a seafood restaurant and as a heating and air-conditioning assistant, mainly wrapping fiberglass insulation around air-conditioning ducts in attics. These jobs were motivation to go to college and earn a business degree.

When I began college in 1977, I was undecided between accounting and finance as my business major. One path was the field of public accounting and the ���big eight��� firms. Another was finance and investing. I took many accounting classes but eventually was drawn more to investing, even though the stock market had been moribund for years, with the Dow Jones Industrial Average languishing below 1000.

My final class at the University of Texas at Austin was Modern Portfolio Theory. I did well enough that my finance professor suggested I apply for a job with the university���s endowment fund after graduation. This proved to be excellent advice. It started me on a 35-year career as a money manager, the first of my two professions.

Getting down to work. In 1980, at age 21, I was hired as a junior analyst at the Permanent University Fund, one of the largest college endowment funds in the country. The fund was initially seeded with enormous amounts of Texas scrubland, some of which turned out to be above huge oil deposits. The fund���s substantial assets drew brokerage-firm analysts to our Texas offices. During these visits, they would educate us���and try to persuade us to buy and sell stocks through their firms. Their employers would earn commissions from us and, in exchange, we would get investing advice over meals at high-end restaurants.

When I began my career, trading costs and interest rates were high, and retirement accounts were relatively easy to understand, unlike today���s bewildering array of choices. My first retirement investment was $2,000, which I invested in an IRA soon after the accounts became available to all workers. Since interest rates were so high, I invested in a Fidelity Investments��� money market fund paying more than 15%. Meanwhile, in my taxable account, I remember my first individual stock purchase was John Deere. I bought 50 shares and paid $1 per share in commission to purchase them through a full-service broker.

I have been a life-long learner. In addition to studying the investing business at work, I earned the Chartered Financial Analyst (CFA) designation, which takes a minimum of three years to complete. The CFA was starting to become a mandatory designation for those in the field of institutional investing. In 1983, I was one of the first 10,000 to receive the CFA, and it helped propel my career through several job changes with increasing responsibilities. Today, there are more than 175,000 CFA charter holders.

With my CFA freshly in hand, I took a job as a senior analyst at American National Insurance Co. in Galveston, Texas. I assisted in managing both the insurance company���s stock portfolio and its mutual funds. Mutual funds were not as common then, and our funds charged a 7% front-end load, or commission.

The load was waived for employees, however, so I started investing both my taxable and tax-deferred money in the mutual fund I was helping to manage. I also began managing an equity-income mutual fund for my employer just months before the Oct. 19, 1987, stock market crash, when the U.S. market plunged more than 22% in a single day. The weekend after the crash, I went to the office and made a buy list of the names in the portfolio that had declined to absurdly low levels. My assumption: If the market continued to decline, I���d lose my job anyway���so why not bet that stocks would recover? Fortunately, at the time, CNBC didn���t exist to whip investors into an even greater state of panic. The abrupt loss was a shock, but the market quickly rebounded, recouping almost all its losses by year-end. With the market on the mend and now that I was established as a portfolio manager, I felt confident to embark on family life. In 1988, I got married.

A few years later, I parlayed my investment experience and CFA into a new job, which took me to Oklahoma City, where I worked for the state���s largest money manager. When I left my home state with my pregnant wife in 1991, my only connection in Oklahoma was a co-worker from Galveston who recommended me for the position. My daughter was born later that year and my son in 1995, just six months after the Oklahoma City bombing, which took place a few blocks from my downtown office.

After I became the lead manager for a newly launched mutual fund, I once again transferred my investment account into the fund I was managing. I guess you could say I was eating my own cooking. But I did diversify my holdings a bit. When the firm set up a SEP-IRA, I began dollar-cost averaging into an S&P 500-index fund for my retirement.

After eight years in Oklahoma, I took a new position with broader responsibilities at another insurance company, this one in Cincinnati. I was the firm���s head of equity investing and managed more mutual funds. My move coincided with the beginning of the lost decade for stocks, which started with the dot-com bust of 2000 and ended with the 2008-09 financial meltdown. From 2000 to 2009, the S&P 500 turned in a cumulative total return of -9.1%.

Not only was the market unforgiving, but also I missed my home state of Texas. I wanted to raise my Oklahoma-born children there. In 2006, I kept my job with the Cincinnati insurer, but returned to the Dallas-Fort Worth area and became a pioneer in the ���work from home��� movement. I had hoped to work from home for perhaps two years. Nine years later, I called it a career and stopped working in active stock management. The stress of working from home and telecommuting was exacerbated by the 2008 financial meltdown, and my marriage ended in 2012. While I had witnessed setbacks like 1987���s Black Monday and the 2000-09 lost decade, it had overall been a great era for investors. I had seen the Dow rise from under 1000 to over 17000 during my time in investment management. Amazingly, the Dow has doubled again since then.

Switching gears. When I retired from money management, I was age 55 and felt I still had more to do, so I decided to set myself up for an encore career in retirement planning. My initial motivation: I was interested in researching retirement strategies and products that I might use myself.

To prepare for my encore career, I hit the books again. I researched the retirement planning certifications available and chose to pursue a Retirement Income Certified Professional (RICP) designation. I had to pass a three-part exam that covered all things retirement, including Social Security, Medicare, long-term-care insurance, annuities and portfolio withdrawal strategies. I soon realized I needed to become a licensed insurance agent if I wanted to sell the financial products about which I had just learned. I passed the health and life insurance exam, which allow me to sell life insurance, annuities and long-term-care insurance. All this education helped me to better analyze the investment and insurance offerings available to retirees.

What did I want to achieve with these products? Like many looking ahead to retirement, I had a handful of financial concerns. I didn���t want to outlive my savings. I was worried about the potentially crippling cost of long-term care. I wanted to leave behind some money for my heirs. I was concerned that I could face steep taxes in retirement, especially once I turned age 72 and had to start taking required minimum distributions from my retirement accounts.

To address these worries, I began experimenting with a host of products and strategies, using myself as the guinea pig. My first foray was to purchase a whole-life insurance policy, which gave me a promised death benefit twinned with a tax-favored investment account. I wanted to create a pool of money that would pass tax-free to my heirs upon my death. I overfunded the policy with the maximum legally allowed, so I would get the greatest benefit from the tax-free cash buildup. Today, seven years later, the policy���s cash value is growing at 3.5% annually. I tried to add a long-term-care rider to the policy, so I could tap the policy���s value to pay for at-home care and similar costs, but I was deemed too risky by the insurer. I suspect it was because my medical records included three different surgeries���on my rotator cuff, hip and neck.



My second experiment: purchasing qualified longevity annuity contracts, or QLACs. These deferred-income annuities were appealing to me. I could use money from my traditional IRA to hedge against the risk of outliving my money. For a comparatively small investment, these annuities provide guaranteed lifetime income, with the payouts beginning relatively late in life���potentially as late as age 85. I already had a life insurance policy to benefit my heirs, so I opted for annuities that simply paid income for as long as I lived. These annuities potentially kicked off the highest monthly benefit but left no residual value for my heirs and there���s a risk that even I won���t receive anything, should I die before the payment period begins.

This made my next decision crucial. At what age should the annuity payments begin? I hedged my bets by buying three policies, each starting payments at a different age. It was a bit like putting chips down on three different numbers on a roulette table.

I invested $25,000 in a payment plan that starts at age 85. This investment would give me a high potential payout. The $25,000 I invested will kick off $18,000 a year for life���provided, of course, that I live until 85.

I invested in a second policy that begins paying out when I���m 76. I wanted to generate $1,000 in monthly income from the policy. It turned out that could be accomplished if I invested $50,000.

With my third choice, I invested $50,000 to buy payments beginning at age 80. This will pay me $18,000 annually, should I live to receive it. That is the same amount of income I���ll potentially receive from the policy that begins paying out at 85, and yet I had to invest twice as much to guarantee the same amount of income because it���s scheduled to start paying me income five years earlier. After seven years, these QLACs are effectively worth twice what I invested, as interest rates have declined and there are seven fewer years before I start collecting.

Taking care. My next retirement experiment came about almost by happenstance. As part of my information gathering, I would often go to hear sales pitches for various retirement products. I received an invitation for a presentation in Dallas on Medicare products and long-term-care (LTC) insurance. The presentation centered on hybrid LTC insurance, which involves twinning either a tax-deferred annuity or a life insurance policy with an LTC benefit. These policies involve making a large upfront investment, with the potential to receive some multiple of that sum as an LTC benefit, should you need care.

I left the meeting intrigued, though also dubious about the presenters��� claims. Traditional LTC insurance has a terrible reputation, thanks to frequent and large premium increases. But according to the presenters, hybrid LTC was different. There would never be price increases. In addition, the presenters said that���if I changed my mind���I could get a full refund of the sum invested at any time. And they said insurers would accept candidates like me, whom a provider of standard long-term-care coverage would likely deny.

I felt I owed it to myself to investigate further. I took continuing education classes on traditional and hybrid LTC insurance. I questioned fellow professionals about the product. I even contacted former coworkers who worked for insurance companies that were offering hybrid LTC insurance. All this research eventually convinced me to purchase a joint policy for myself and my girlfriend. The ���retirement smile,��� made famous by retirement researcher David Blanchett, posits that spending through retirement steadily declines until���late in life���steep medical costs kick in and retirement expenses climb again. Now, I feel prepared for that possibility.

Thanks to the LTC policy, I also feel free to spend at a higher rate from my portfolio earlier in retirement. I don���t have to maintain a ���what if��� LTC contingency fund to pay for my possible long-term care. I have even written a short e-book about hybrid policies, which discusses different examples and benefits. The policy designs are, I���ll admit, a little confusing.

I now have multiple insurance policies in place: a whole-life policy, three QLAC purchases and a hybrid long-term-care policy. The next step in my experimenting was to decide how to maximize my Social Security benefits. I would receive the largest monthly payout if I delayed benefits until age 70.

I had read financial-planning expert Wade Pfau���s article about building a Social Security ���bridge,��� which is designed to replicate Social Security payments until benefits begin at age 70. I could use cash, a ladder built using certificates of deposit, or buy a period-certain annuity. It turned out the highest return would come from a so-called period certain annuity, which could provide me with monthly checks from age 62 to 70.

After spending $125,000 from my trusty IRA for the QLACs, I withdrew another $200,000 for the period certain annuity. It will provide me with $30,000 annually for eight years. I purchased the annuity four years before I turned 62 to lock in a higher payout rate. Now, at age 62, I���ve begun receiving payments. When they end at age 70, my Social Security benefit will begin.

There has been one other key element to my retirement plan. At age 55, I converted $1,000 from my IRA to my Roth IRA for one simple reason: I wanted to start the five-year clock on my Roth account, so I would be eligible to take tax-free withdrawals���if needed���at age 60. I subsequently converted more assets to my Roth account, thereby reducing the size of my traditional IRA even further. This will ensure smaller required minimum distributions starting at age 72, leading to lower tax bills in my 70s and beyond.

I wanted to get these Roth conversions wrapped up by age 62. Why? When Medicare benefits start at age 65, the premiums can be higher���sometimes much higher���if your income is above certain thresholds. The tricky part: These Medicare premiums are based on your income from two years earlier���the year when folks turn age 63.

What���s left on my retirement timeline? My next move will be to file for Medicare three months before I turn 65. I also plan to purchase two other insurance policies: a Medigap Plan G policy and Part D prescription drug coverage, which will supplement the coverage provided by Medicare. At age 70, of course, I plan to file for my Social Security benefit. Under current law, I will need to take distributions from my traditional IRA after 72. While I have reduced its balance substantially by purchasing insurance policies and through Roth conversions, I still have money in a traditional IRA. I may take advantage of so-called qualified charitable distributions to contribute that money directly to charity after age 70�� or, alternatively, leave part of the balance to my children.

Having spent seven years planning my retirement, I���m now turning my attention to enjoying the fruits of that planning, especially travel. Even though my grown children now live in Colorado, I enjoy taking them on adventures. So far, my children and I have been to the Amazon, Thailand and Egypt. I have taken my girlfriend to Aruba and to a coffee farm outside Medellin, Colombia. I have also traveled solo to Germany, the Czech Republic and Poland, where I taught English as a second language. My other retirement passion is playing pickleball, which is like the tennis I learned in high school, but easier on the knees. I���ve begun playing in pickleball tournaments and even volunteered at my local pickleball facility to be the pickleball commissioner.

What about the retirement planning business I launched? What began as an encore career morphed primarily into designing my personal retirement plan, while also advising friends and family on Social Security, Medicare, annuities and LTC insurance. I plan to continue helping others through my articles and books���and sometimes, in between games, on the pickleball court.

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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