Jonathan Clements's Blog, page 242
December 23, 2021
COBRA Call Option
I QUIT MY JOB last year��and then found I needed medical care. My old employer was required to offer me health insurance���but it was expensive. Luckily, I found a loophole that allowed me to obtain the coverage I wanted at a bargain price. I got the treatment I needed, and saved almost $1,000.
First, a bit of background. More than half of the U.S. adult population gets health insurance through their employer. Indeed, according to a Gallup��survey, one out of six adult workers with employer-based health insurance remains at an unwanted job because of the health benefits. But there are ways to get health coverage if you leave your job, one of which is provided by the Consolidated Omnibus Budget Reconciliation Act (COBRA).
In essence, COBRA lets you continue your employer coverage for a certain amount of time, usually 18 to 36 months. The length of time depends on your age and reason for leaving.
The downside���and why COBRA has a negative reputation���is it���s expensive. You get to continue health insurance coverage, but at full cost. Any subsidy your employer was providing no longer applies. You will likely pay up to 102% of the actual cost of coverage. This creates expensive monthly premiums just to keep the policy���coverage you won���t use if you remain in good health.
But COBRA also has an intriguing feature: a 60-day window to elect coverage. This creates what some call ���free��� coverage, but I think it���s better viewed as a free ���call option��� on health insurance. You have the right, but not the obligation, to claim health insurance retroactively. If you elect COBRA at any time within 60 days after losing coverage, the coverage is retroactive to day one, as if your health insurance never lapsed.
The strategy here is to do nothing. COBRA is your safety net should medical costs arise. But if you���re perfectly well for 60 days, you don���t need to buy the policy and pay for insurance you didn���t use. Instead, at the end of the 60 days, you might purchase coverage through, say, your state���s health care exchange.
Here���s how this worked for me. I quit my job at the end of August 2020. I knew I had a looming oral surgery, but nothing was scheduled when I quit. Soon after leaving, my surgery was scheduled for the end of October���59 days after my last day of employer coverage.
I looked into private dental insurance plans. I found most have a 12-month waiting period for major services, so that wasn���t an option.
On my first glance at the COBRA paperwork, I ruled out coverage because the premium would be more than $500 a month. But on closer inspection, I realized that I could separately elect health, dental and vision insurance.
Dental insurance by itself turned out to be just $33 a month. In late October, I elected dental coverage at a cost of $66 for two months. This gave me coverage for September and October. The policy had a $1,000 maximum benefit, which it paid me in full after my care. I subsequently dropped the coverage.
Is $1,000 a life-changing amount of money? No. But a $1,000 payout at a cost of $66 is a great return on investment.
COBRA is typically available from companies that offer health insurance and have at least 20 employees. Some states require even smaller firms to provide coverage, known as mini-COBRA. My recommendation: Read any documentation carefully so you understand your options.
Logan Murray is a solo��financial advisor. His company��
Pocket Project
��offers��subscription-based financial planning services to young professionals. For more financial insights, check out Logan���s��
blog
��or connect with him on��
LinkedIn
.
First, a bit of background. More than half of the U.S. adult population gets health insurance through their employer. Indeed, according to a Gallup��survey, one out of six adult workers with employer-based health insurance remains at an unwanted job because of the health benefits. But there are ways to get health coverage if you leave your job, one of which is provided by the Consolidated Omnibus Budget Reconciliation Act (COBRA).
In essence, COBRA lets you continue your employer coverage for a certain amount of time, usually 18 to 36 months. The length of time depends on your age and reason for leaving.
The downside���and why COBRA has a negative reputation���is it���s expensive. You get to continue health insurance coverage, but at full cost. Any subsidy your employer was providing no longer applies. You will likely pay up to 102% of the actual cost of coverage. This creates expensive monthly premiums just to keep the policy���coverage you won���t use if you remain in good health.
But COBRA also has an intriguing feature: a 60-day window to elect coverage. This creates what some call ���free��� coverage, but I think it���s better viewed as a free ���call option��� on health insurance. You have the right, but not the obligation, to claim health insurance retroactively. If you elect COBRA at any time within 60 days after losing coverage, the coverage is retroactive to day one, as if your health insurance never lapsed.
The strategy here is to do nothing. COBRA is your safety net should medical costs arise. But if you���re perfectly well for 60 days, you don���t need to buy the policy and pay for insurance you didn���t use. Instead, at the end of the 60 days, you might purchase coverage through, say, your state���s health care exchange.
Here���s how this worked for me. I quit my job at the end of August 2020. I knew I had a looming oral surgery, but nothing was scheduled when I quit. Soon after leaving, my surgery was scheduled for the end of October���59 days after my last day of employer coverage.
I looked into private dental insurance plans. I found most have a 12-month waiting period for major services, so that wasn���t an option.
On my first glance at the COBRA paperwork, I ruled out coverage because the premium would be more than $500 a month. But on closer inspection, I realized that I could separately elect health, dental and vision insurance.
Dental insurance by itself turned out to be just $33 a month. In late October, I elected dental coverage at a cost of $66 for two months. This gave me coverage for September and October. The policy had a $1,000 maximum benefit, which it paid me in full after my care. I subsequently dropped the coverage.
Is $1,000 a life-changing amount of money? No. But a $1,000 payout at a cost of $66 is a great return on investment.
COBRA is typically available from companies that offer health insurance and have at least 20 employees. Some states require even smaller firms to provide coverage, known as mini-COBRA. My recommendation: Read any documentation carefully so you understand your options.
Logan Murray is a solo��financial advisor. His company��
Pocket Project
��offers��subscription-based financial planning services to young professionals. For more financial insights, check out Logan���s��
blog
��or connect with him on��
LinkedIn
.The post COBRA Call Option appeared first on HumbleDollar.
December 22, 2021
Eyeing the Aisles
ALDI IS A POPULAR grocery store chain with a cult-like following in some parts of the country. This family-owned business is based in Germany but currently expanding in the U.S. I always knew that frugal shoppers loved Aldi.
Still, I was surprised to learn just how inexpensive the company���s products are. According to a recent Bank of America Global Research study of the Nashville area, Walmart has the cheapest prices among conventional, mass and specialty grocers, and even compared to dollar stores. But it turns out Aldi is even cheaper���by 4%.
I prefer Walmart���s one-stop shopping experience. I can also get in and out quickly with self-checkout at ���Wally World,��� whereas Aldi customers typically wait in line at the register. What���s more, Aldi shoppers must make a small deposit just to use a cart, an annoying inconvenience in my eyes.
What���s also interesting about the Bank of America survey is how expensive Whole Foods and even Publix are compared to Walmart���s dirt-cheap prices. The results show that Whole Paycheck���err, Whole Foods���is a whopping 42% pricier. Publix, the beloved Florida-based grocery store chain, is almost as expensive as Whole Foods and some 37% pricier than Walmart.
Having worked at Publix for several years in high school and college, I like to keep tabs on grocery industry trends. To this day, I remain an owner of Publix shares through a pair of retirement plans. While I love my shares, I���m not as fond of those high grocery prices. I���ll stick with Walmart for its everyday low prices.
Still, I was surprised to learn just how inexpensive the company���s products are. According to a recent Bank of America Global Research study of the Nashville area, Walmart has the cheapest prices among conventional, mass and specialty grocers, and even compared to dollar stores. But it turns out Aldi is even cheaper���by 4%.
I prefer Walmart���s one-stop shopping experience. I can also get in and out quickly with self-checkout at ���Wally World,��� whereas Aldi customers typically wait in line at the register. What���s more, Aldi shoppers must make a small deposit just to use a cart, an annoying inconvenience in my eyes.
What���s also interesting about the Bank of America survey is how expensive Whole Foods and even Publix are compared to Walmart���s dirt-cheap prices. The results show that Whole Paycheck���err, Whole Foods���is a whopping 42% pricier. Publix, the beloved Florida-based grocery store chain, is almost as expensive as Whole Foods and some 37% pricier than Walmart.
Having worked at Publix for several years in high school and college, I like to keep tabs on grocery industry trends. To this day, I remain an owner of Publix shares through a pair of retirement plans. While I love my shares, I���m not as fond of those high grocery prices. I���ll stick with Walmart for its everyday low prices.
The post Eyeing the Aisles appeared first on HumbleDollar.
Fire Gods, Unite
I HAVE A SECRET to share. I���m a Fire God, and quite proud of it. My first engineering job was with General Electric���s Aerospace Division in Valley Forge, Pennsylvania. I started in the thermal engineering group. The group was responsible for the design, fabrication, integration, testing and operation of spacecraft temperature control systems.
An important part of the design was managing the heat input from the sun. Since the group ���controlled the sun,��� someone gave the group the moniker ���Fire Gods.��� I knew none of this when I joined as a young graduate. But I quickly realized that it was an exceptional group of engineers. They also had a personality that fit mine. I rapidly took to the work and meshed with the group. I got involved in the company-sponsored softball and basketball leagues. Our teams proudly wore their Fire God T-shirts.
Thirty-eight years ago, one of the senior members, Tom, bought a new home. He decided to invite the group for a Christmas party. It was a lot of fun, so he repeated it the following year. Each succeeding year, he asked if folks were still interested in attending, and each year the answer was ���yes.���
I just returned from attending the 38th consecutive party. Due to the pandemic, last year���s party was a remote affair via Zoom. This year, Tom was able to restart the in-person party, with all attendees having been vaccinated and boosted. This year���s party was quite small. Most of those present were fully or partly retired. The oldest was 91 and youngest was in his mid-50s. Only one attendee is still working fulltime, and he���s retiring in March. A few of us are still doing some low-level consulting.
The party has changed considerably over the years. When I started, there was a nice mix of senior, mid-career and junior engineers. GE liked to rotate young people through assignments early in their career, so there was usually some new young blood to liven things up. As the night wore on, the party would get a bit raucous���or, at least, as raucous as a group of engineers can get.
Over the years, we���ve seen numerous mergers, sales, closures, re-openings and relocations of the business. The original group would now be considered part of Lockheed Martin, headquartered in Denver. Only a few folks still work in a small division in Valley Forge. Many dozens have left and gone on to work at companies all over the country.
Why am I boring you with this story? When I retired from fulltime work, my wife encouraged me to find ways to stay connected with friends and colleagues. She knew it would be important for me to maintain the friendship, common interests and intellectual stimulation they provided. There���s ample academic research to back this up. We need social connections in retirement.
But staying connected requires effort. Someone has to make the phone calls or send the emails to organize a lunch. Tom has made that effort, year after year, and it���s made a difference in the lives of many of us and helped us keep strong those unique connections built during our working years.
If you find you���re losing those connections, you might need to be the one to make the effort. Pick up the phone. Send the text. Write the e-mail. That small investment in time will pay big dividends.
An important part of the design was managing the heat input from the sun. Since the group ���controlled the sun,��� someone gave the group the moniker ���Fire Gods.��� I knew none of this when I joined as a young graduate. But I quickly realized that it was an exceptional group of engineers. They also had a personality that fit mine. I rapidly took to the work and meshed with the group. I got involved in the company-sponsored softball and basketball leagues. Our teams proudly wore their Fire God T-shirts.
Thirty-eight years ago, one of the senior members, Tom, bought a new home. He decided to invite the group for a Christmas party. It was a lot of fun, so he repeated it the following year. Each succeeding year, he asked if folks were still interested in attending, and each year the answer was ���yes.���
I just returned from attending the 38th consecutive party. Due to the pandemic, last year���s party was a remote affair via Zoom. This year, Tom was able to restart the in-person party, with all attendees having been vaccinated and boosted. This year���s party was quite small. Most of those present were fully or partly retired. The oldest was 91 and youngest was in his mid-50s. Only one attendee is still working fulltime, and he���s retiring in March. A few of us are still doing some low-level consulting.
The party has changed considerably over the years. When I started, there was a nice mix of senior, mid-career and junior engineers. GE liked to rotate young people through assignments early in their career, so there was usually some new young blood to liven things up. As the night wore on, the party would get a bit raucous���or, at least, as raucous as a group of engineers can get.
Over the years, we���ve seen numerous mergers, sales, closures, re-openings and relocations of the business. The original group would now be considered part of Lockheed Martin, headquartered in Denver. Only a few folks still work in a small division in Valley Forge. Many dozens have left and gone on to work at companies all over the country.
Why am I boring you with this story? When I retired from fulltime work, my wife encouraged me to find ways to stay connected with friends and colleagues. She knew it would be important for me to maintain the friendship, common interests and intellectual stimulation they provided. There���s ample academic research to back this up. We need social connections in retirement.
But staying connected requires effort. Someone has to make the phone calls or send the emails to organize a lunch. Tom has made that effort, year after year, and it���s made a difference in the lives of many of us and helped us keep strong those unique connections built during our working years.
If you find you���re losing those connections, you might need to be the one to make the effort. Pick up the phone. Send the text. Write the e-mail. That small investment in time will pay big dividends.
The post Fire Gods, Unite appeared first on HumbleDollar.
Choosing Your Legacy
ONE OF MY FAVORITE movies is based on A Christmas Carol, the Charles Dickens classic. It���s about the mean and miserable Ebenezer Scrooge, a money lender who constantly bullies his poor clerk, Bob Cratchit, and rejects his nephew Fred���s wishes for a merry Christmas.
Scrooge lives only for money. He has no real friends or family, and cares only about his own well-being. As the story goes, on Christmas Eve, Scrooge is visited by three ghosts. They teach him about the Christmas spirit through visions of Christmases past, present and future. In each visit, he sees either the negative consequences his miserly nature has created or the good tidings that others bring about through their love and kindness.
Scrooge sees his future death���dying alone with no one to mourn him. He has his money and his possessions, but nothing else. He finally understands why qualities like generosity and love are some of the most important things in life.
He���s grateful when he realizes he has a chance to redeem himself and change his future. This is the important message conveyed by Dickens. If Scrooge can change and improve his future, then anyone can. Dickens reminds us that we still have a last chance to be remembered as we would wish. But we need to start living that way today, while we still have the opportunity to change the direction of our life.
For many of us, the pandemic has spurred a re-evaluation of our values and priorities. Similar to Scrooge, we were all sent to our rooms by the man upstairs to think things over. We were given a lot of time to take inventory of our life and to think about what our future life could be like. The pandemic has also reminded us of our own mortality���that life is short. That caused many of us to reprioritize things.
When I used to think about my legacy, it was about having a will and leaving behind as much as I could for my kids. But because of the pandemic, when I think about my legacy these days, I don���t think about how much money I���ve managed to save or the stuff I���m going to leave behind. Just like Scrooge, my focus has changed to the good I have done and the people I���ve touched. That���s what gives me meaning now. Everything I do these days is for meaning, not money.
Imagine you���re age 90 and looking back over your life.
Are you proud of it?
Outside of your will, what will your legacy be?
Did you live the life you wanted to live?
Did you miss out on anything?
What can you do better?
What do you want to change?
Did you serve as a good role model for your kids and others?
What���s missing from your life that you want to add?
What���s left that you need to do?
What will your story be when it���s told to someone after you���re gone?
We all want to arrive at the end of our days knowing that we did everything we could to live the life we wanted. You don���t want to end up like all too many people, who finally figure out how to live while lying on their deathbed, suffering from regret.
Retirement is all about choices. One of the most important choices you���ll make is what kind of person do you want to be as you age. Do you want to be a grumpy old man or woman���or like Scrooge on Christmas day?
Mike Drak is a 38-year veteran of the financial services industry. He���s the author of
Retirement Heaven or Hell
, published in 2021, as well as an earlier book,
Victory Lap Retirement
. Mike works with his wife, an investment advisor, to help clients design a fulfilling retirement. For more on Mike, head to��
BoomingEncore.com
. Check out��his earlier articles.
Scrooge lives only for money. He has no real friends or family, and cares only about his own well-being. As the story goes, on Christmas Eve, Scrooge is visited by three ghosts. They teach him about the Christmas spirit through visions of Christmases past, present and future. In each visit, he sees either the negative consequences his miserly nature has created or the good tidings that others bring about through their love and kindness.
Scrooge sees his future death���dying alone with no one to mourn him. He has his money and his possessions, but nothing else. He finally understands why qualities like generosity and love are some of the most important things in life.
He���s grateful when he realizes he has a chance to redeem himself and change his future. This is the important message conveyed by Dickens. If Scrooge can change and improve his future, then anyone can. Dickens reminds us that we still have a last chance to be remembered as we would wish. But we need to start living that way today, while we still have the opportunity to change the direction of our life.
For many of us, the pandemic has spurred a re-evaluation of our values and priorities. Similar to Scrooge, we were all sent to our rooms by the man upstairs to think things over. We were given a lot of time to take inventory of our life and to think about what our future life could be like. The pandemic has also reminded us of our own mortality���that life is short. That caused many of us to reprioritize things.
When I used to think about my legacy, it was about having a will and leaving behind as much as I could for my kids. But because of the pandemic, when I think about my legacy these days, I don���t think about how much money I���ve managed to save or the stuff I���m going to leave behind. Just like Scrooge, my focus has changed to the good I have done and the people I���ve touched. That���s what gives me meaning now. Everything I do these days is for meaning, not money.
Imagine you���re age 90 and looking back over your life.
Are you proud of it?
Outside of your will, what will your legacy be?
Did you live the life you wanted to live?
Did you miss out on anything?
What can you do better?
What do you want to change?
Did you serve as a good role model for your kids and others?
What���s missing from your life that you want to add?
What���s left that you need to do?
What will your story be when it���s told to someone after you���re gone?
We all want to arrive at the end of our days knowing that we did everything we could to live the life we wanted. You don���t want to end up like all too many people, who finally figure out how to live while lying on their deathbed, suffering from regret.
Retirement is all about choices. One of the most important choices you���ll make is what kind of person do you want to be as you age. Do you want to be a grumpy old man or woman���or like Scrooge on Christmas day?
Mike Drak is a 38-year veteran of the financial services industry. He���s the author of
Retirement Heaven or Hell
, published in 2021, as well as an earlier book,
Victory Lap Retirement
. Mike works with his wife, an investment advisor, to help clients design a fulfilling retirement. For more on Mike, head to��
BoomingEncore.com
. Check out��his earlier articles.The post Choosing Your Legacy appeared first on HumbleDollar.
December 21, 2021
Make a Wish
ECONOMISTS SUGGEST we stop spending excessively on Christmas gifts and instead buy more prudently or efficiently, according to an NPR story. Modern scrooges, you say? Not really.
The economists questioned believe huge amounts of money are wasted because we buy gifts that recipients don���t want, like or keep. In the interview, economist Tim Harford suggests more thoughtful gift-giving by, say, using wish lists to buy folks what they really want. We���ve been doing this in my immediate family for years, and it works. We suggest multiple items, so an element of surprise remains.
On the other hand, I���ve loved when people gave me presents that I didn���t ask for or expect. When I turned 14, my mom bought me a mini-bike so I could tear around the dirt and gravel roads of the campground where we had our weekend cottage.
For the most part, however, my extended family of parents, grandparents, aunts and uncles usually stuffed an envelope with cash for Christmas, birthdays, religious rites, graduations and so on. There were no gift cards back then, or at least not that I recall.
It seemed impersonal, but I enjoyed being able to go downtown or to the mall and buy what I wanted. I also saved some of that money, not something you can do with yet another shirt or sweater. And yet many of us have conflicted feelings about cash gifts. While 61% of people would prefer cash, only 40% want to give money, according to a 2019 article.
Eventually, I married a woman who loves to give gifts and knows how to do it well. She introduced me to wish lists, which we had never used in my family. Still, even if an item isn���t needed or on a wish list, you can���t ignore gifting traditions. For many years, I���ve included a piece of vintage jewelry among the gifts for my daughter. She doesn���t need more jewelry, but she���s really loved some pieces and that made both of us happy.
This Christmas, my grown kids and I aren���t writing wish lists, and I expect nothing. Yes, I think we���ll have a few small things���what you might call stocking stuffers���to exchange. But my real joy will be spending time with them. Being together is what matters most.
The economists questioned believe huge amounts of money are wasted because we buy gifts that recipients don���t want, like or keep. In the interview, economist Tim Harford suggests more thoughtful gift-giving by, say, using wish lists to buy folks what they really want. We���ve been doing this in my immediate family for years, and it works. We suggest multiple items, so an element of surprise remains.
On the other hand, I���ve loved when people gave me presents that I didn���t ask for or expect. When I turned 14, my mom bought me a mini-bike so I could tear around the dirt and gravel roads of the campground where we had our weekend cottage.
For the most part, however, my extended family of parents, grandparents, aunts and uncles usually stuffed an envelope with cash for Christmas, birthdays, religious rites, graduations and so on. There were no gift cards back then, or at least not that I recall.
It seemed impersonal, but I enjoyed being able to go downtown or to the mall and buy what I wanted. I also saved some of that money, not something you can do with yet another shirt or sweater. And yet many of us have conflicted feelings about cash gifts. While 61% of people would prefer cash, only 40% want to give money, according to a 2019 article.
Eventually, I married a woman who loves to give gifts and knows how to do it well. She introduced me to wish lists, which we had never used in my family. Still, even if an item isn���t needed or on a wish list, you can���t ignore gifting traditions. For many years, I���ve included a piece of vintage jewelry among the gifts for my daughter. She doesn���t need more jewelry, but she���s really loved some pieces and that made both of us happy.
This Christmas, my grown kids and I aren���t writing wish lists, and I expect nothing. Yes, I think we���ll have a few small things���what you might call stocking stuffers���to exchange. But my real joy will be spending time with them. Being together is what matters most.
The post Make a Wish appeared first on HumbleDollar.
Pain Postponed
BUY NOW PAY LATER is an online payment method that���s growing in popularity. Money and investors have moved toward participating companies big and small, as they seek to stake their claim in this growing market. What���s the big deal and why is everyone excited?
Buy Now Pay Later (BNPL) allows consumers to purchase goods and pay for them in the future. Approval happens in seconds. You make a down payment, such as 25% of the total purchase, and pay off the remaining amount in a series of interest-free installments.
This isn���t new. Variations have been around for more than a century. When I was a kid, I bought a camera on layaway from the nearby Target store. I don't remember how much it cost, but I do remember how great it felt to bring the camera home after I made the last payment. The difference now? Financial technology and new apps allow companies to aim BNPL at young people making online impulse purchases of, say, fashion items or small electronics.
Young people, it seems, dislike credit cards and the very high interest charges that banks impose when customers don���t pay off their full balance. Gen Z shoppers prefer the feeling of control they get from BNPL���s fixed payment schedules. Britain���s Financial Conduct Authority cites data showing half of BNPL users are under age 36, and the average spend on a BNPL app was recently reported to be $100.
Who���s offering these payment methods? Compared to the U.K. or Australia, there���s much less market penetration in the U.S. Pure-play companies include Affirm Holdings in the U.S., Klarna in Sweden, Afterpay in Australia and Revolut in Britain. Established companies are buying or developing their way in: PayPal bought Japan's Paidy. Apple is teaming up with Goldman Sachs. Shopify now offers BNPL, and Visa and Mastercard are developing technology for their issuer banks.
Why is it becoming popular now? The new companies didn���t make much headway at first. Then, in 2019, Walmart switched its credit-card servicer, partly because of frustration at the slow pace of new credit approvals. Simultaneously, Walmart partnered with Affirm to offer BNPL in hopes of finding a more efficient way to extend credit and thereby increase sales.
Over the same period, online retailers were struggling with ways to turn abandoned shopping carts into completed purchases. As BNPL gained traction within Walmart, others figured BNPL could help with the abandoned cart problem. In 2021, Square announced it would acquire Afterpay and Amazon announced it would partner with Affirm to introduce BNPL for the vendors on its platform.
How does buying now and paying later differ from using a credit card?
Users don���t pay interest. Merchants pay a transaction fee to the BNPL company.
Many BNPL vendors conduct soft credit checks, the kind usually used for informational purposes that don���t affect your credit score. This leads to faster approvals than the hard credit checks lenders perform when you apply for a credit card or a mortgage. Hard credit checks affect your credit score.
BNPL companies aren���t just offering the technology and facilitating the transaction. They also take on the credit risk of lending to customers who use the payment method.
Users incur fees for missed payments. Missing multiple payments could result in an account landing with a collection agency.
A 2020 report from the Australian Securities & Investments Commission revealed that 20% of consumers were missing payments and 15% of consumers had to take out additional loans to cover their BNPL obligations. The U.K. reported similar conclusions. Buy Now Pay Later doesn���t benefit everyone involved.
Still, it���s a payment method that���s here to stay. Best to think of it as just another way to more easily separate consumers from their money.
Phil Kernen, CFA, is a portfolio manager and partner with
Mitchell Capital
, a financial planning and investment management firm in Leawood, Kansas. When he's not working, Phil enjoys spending time with his family and friends, reading, hiking and riding his bike. You can connect with Phil via
LinkedIn
. Check out his earlier articles.
Buy Now Pay Later (BNPL) allows consumers to purchase goods and pay for them in the future. Approval happens in seconds. You make a down payment, such as 25% of the total purchase, and pay off the remaining amount in a series of interest-free installments.
This isn���t new. Variations have been around for more than a century. When I was a kid, I bought a camera on layaway from the nearby Target store. I don't remember how much it cost, but I do remember how great it felt to bring the camera home after I made the last payment. The difference now? Financial technology and new apps allow companies to aim BNPL at young people making online impulse purchases of, say, fashion items or small electronics.
Young people, it seems, dislike credit cards and the very high interest charges that banks impose when customers don���t pay off their full balance. Gen Z shoppers prefer the feeling of control they get from BNPL���s fixed payment schedules. Britain���s Financial Conduct Authority cites data showing half of BNPL users are under age 36, and the average spend on a BNPL app was recently reported to be $100.
Who���s offering these payment methods? Compared to the U.K. or Australia, there���s much less market penetration in the U.S. Pure-play companies include Affirm Holdings in the U.S., Klarna in Sweden, Afterpay in Australia and Revolut in Britain. Established companies are buying or developing their way in: PayPal bought Japan's Paidy. Apple is teaming up with Goldman Sachs. Shopify now offers BNPL, and Visa and Mastercard are developing technology for their issuer banks.
Why is it becoming popular now? The new companies didn���t make much headway at first. Then, in 2019, Walmart switched its credit-card servicer, partly because of frustration at the slow pace of new credit approvals. Simultaneously, Walmart partnered with Affirm to offer BNPL in hopes of finding a more efficient way to extend credit and thereby increase sales.
Over the same period, online retailers were struggling with ways to turn abandoned shopping carts into completed purchases. As BNPL gained traction within Walmart, others figured BNPL could help with the abandoned cart problem. In 2021, Square announced it would acquire Afterpay and Amazon announced it would partner with Affirm to introduce BNPL for the vendors on its platform.
How does buying now and paying later differ from using a credit card?
Users don���t pay interest. Merchants pay a transaction fee to the BNPL company.
Many BNPL vendors conduct soft credit checks, the kind usually used for informational purposes that don���t affect your credit score. This leads to faster approvals than the hard credit checks lenders perform when you apply for a credit card or a mortgage. Hard credit checks affect your credit score.
BNPL companies aren���t just offering the technology and facilitating the transaction. They also take on the credit risk of lending to customers who use the payment method.
Users incur fees for missed payments. Missing multiple payments could result in an account landing with a collection agency.
A 2020 report from the Australian Securities & Investments Commission revealed that 20% of consumers were missing payments and 15% of consumers had to take out additional loans to cover their BNPL obligations. The U.K. reported similar conclusions. Buy Now Pay Later doesn���t benefit everyone involved.
Still, it���s a payment method that���s here to stay. Best to think of it as just another way to more easily separate consumers from their money.
Phil Kernen, CFA, is a portfolio manager and partner with
Mitchell Capital
, a financial planning and investment management firm in Leawood, Kansas. When he's not working, Phil enjoys spending time with his family and friends, reading, hiking and riding his bike. You can connect with Phil via
LinkedIn
. Check out his earlier articles.The post Pain Postponed appeared first on HumbleDollar.
December 20, 2021
Living Simply
HOW MUCH INCOME do I need to retire? That���s a question many Americans have. I recently learned the hard way how different the answers can be. On a Facebook group, a person posted the question, ���Can I retire on $40,000 a year?���
I thought the question was about living on $40,000 a year after earning a much higher salary. I was wrong and insensitive. I replied from my life perspective that it would be tough to live on that amount for 30-plus years in retirement. My property taxes and homeowners��� association fees alone are more than half that amount, and in normal times I spend $20,000 annually on travel.
Other members of the group took me to task, and rightly so. Then I recalled that tens of millions of Americans live on that amount or less for their entire life. The median retirement��income is $47,357, which means half of retirees live on less. By some estimates, 40% of retirees get by solely on their monthly Social Security check.
What about lifestyle? Again, the comments from others brought me back to reality. Those living on $40,000 a year or less often described themselves as doing fine, enjoying retirement, and even being able to travel and live comfortably.
It became clear that what makes people comfortable and able to enjoy life isn���t all about income. I like staying in nice hotels, book mini-suites when I take cruises and rent houses in Florida in the winter. By contrast, one person said their desired travel was a road trip���sleeping in the back of their minivan and stopping at free campgrounds.
A woman described her comfortable lifestyle as having no debt, not going out to eat and living frugally, just as she had done her entire life. The words ���living simply��� popped up frequently.
When their mortgage is paid off and the kids are out of the house, one couple planned to retire ���easily��� on $40,000 a year at ages 54 and 56. Retiring at 54 is truly beyond my comprehension.
Is living simply and having enough to ���get by��� a sound retirement goal? Or is it what many people must settle for based on their circumstances? When I hear people talk about retiring before age 60, and living frugally to do so, I believe these retirees are living too close to the edge. They���re too optimistic���and perhaps na��ve���about the next 30 or 40 years.
Maintaining your preretirement lifestyle may sound easy. But the nature of expenses in retirement, plus inflation and the ups and downs of the stock market, say otherwise.
I retired at 67, when I was sure that my retirement income would equal the base pay I earned before retiring. Did I miss out on a decade or more of enjoying retirement? Did I trade some of my present leisure years for greater security? I did, and intentionally so. I don���t feel cheated, but I do feel financially secure.
The post Living Simply appeared first on HumbleDollar.
Taking Shelter
EARLIER THIS YEAR, I swapped the Vanguard Short-Term Bond Index Fund (symbol:��VBIPX) in my 401(k) for an inflation-indexed Treasury ETF (VTIP). The trade worked out well: The replacement fund has since fared better, thanks to this year���s accelerating inflation.
To buy the inflation-indexed ETF, I had to open a brokerage subaccount within my company���s retirement plan���a feature some 401(k)s offer, though these ���brokerage windows��� typically aren���t heavily promoted for fear employees will end up trading too much. Initially, I didn���t think I���d use the subaccount for anything else. But I���ve come to realize that the flexibility to choose from thousands of securities in a tax-deferred account could come in handy.
For instance, in my regular taxable account, I had��bought income-producing funds that own real estate investment trusts (REITs). I like the generous dividends, but not the tax bill, even after the 20%��deduction. I wish I owned these in my 401(k) subaccount instead. That way, I could defer the taxes, instead of footing the bill during my high-earning years.
Another problem I often face: headaches caused by tax-loss��harvesting. In the past, I���d sell an investment to book a loss and use the proceeds to buy a similar, but not substantially identical, investment to preserve my market exposure. I���d then look to switch back to the original investment after the 30-day wash-sale period. But if the temporary investment had gone up in the intervening period, often I���d be reluctant to reverse course. The reason: The short-term capital gain from the sale would partly negate the harvested tax loss. Result? I���d be stuck with the temporary fund indefinitely.
Now, I can simply buy the temporary fund in the tax-deferred subaccount instead of my taxable account. Even if the temporary fund climbs in value, I can sell it after 30 days���with no taxes owed���and then buy back the original investment in my taxable account.
To buy the inflation-indexed ETF, I had to open a brokerage subaccount within my company���s retirement plan���a feature some 401(k)s offer, though these ���brokerage windows��� typically aren���t heavily promoted for fear employees will end up trading too much. Initially, I didn���t think I���d use the subaccount for anything else. But I���ve come to realize that the flexibility to choose from thousands of securities in a tax-deferred account could come in handy.
For instance, in my regular taxable account, I had��bought income-producing funds that own real estate investment trusts (REITs). I like the generous dividends, but not the tax bill, even after the 20%��deduction. I wish I owned these in my 401(k) subaccount instead. That way, I could defer the taxes, instead of footing the bill during my high-earning years.
Another problem I often face: headaches caused by tax-loss��harvesting. In the past, I���d sell an investment to book a loss and use the proceeds to buy a similar, but not substantially identical, investment to preserve my market exposure. I���d then look to switch back to the original investment after the 30-day wash-sale period. But if the temporary investment had gone up in the intervening period, often I���d be reluctant to reverse course. The reason: The short-term capital gain from the sale would partly negate the harvested tax loss. Result? I���d be stuck with the temporary fund indefinitely.
Now, I can simply buy the temporary fund in the tax-deferred subaccount instead of my taxable account. Even if the temporary fund climbs in value, I can sell it after 30 days���with no taxes owed���and then buy back the original investment in my taxable account.
The post Taking Shelter appeared first on HumbleDollar.
A Matter of Time
I HATE TO BE WRONG. I���ve written before about the technique I���ve developed for evaluating health insurance. My wife and I have used it over the years to decide which plan to select. I���ve shared it with friends and colleagues, and many have found it useful in gaining insight into their own health insurance options. I still think it���s a valid and valuable method.
But our recent experience, after switching health insurance mid-year, made me realize it was missing one important variable���the length of time you���ll be in the plan. If it���s less than a year, it can throw the analysis off.
We���d been using my wife���s employer���s medical insurance since 2017, when I stopped working fulltime. My wife retired in July, so we needed health insurance for the remaining five months of the year.
We could have extended her employer���s coverage with COBRA, but my retiree medical insurance plan seemed the better choice. Through it, we could enroll in one of three medical plans, with the company providing a subsidy based on a retiree���s years of service.
I contacted my retiree benefits service center and requested all the information on the three options. With that in hand, I created a spreadsheet to calculate the minimum and maximum annual costs for each plan. The minimum cost is calculated as 12 months of premium payments. The maximum cost is those premium payments, plus the potential out-of-pocket (OOP) maximum for the year.
Plan A was a preferred provider organization, plan B was a mid-priced high-deductible health plan (HDHP) and plan C was a low-priced HDHP. The table below summarizes the minimum and maximum annual cost for each plan for my wife and me. Although there���s about a $7,000 difference in the annual minimum cost���reflecting the difference in premiums���the maximum cost for the three plans is pretty similar.
If you expect to be healthy and not need medical care, plan C���which is the low-cost HDHP���makes the most sense. You���d pay the lowest premiums and you can contribute to a health savings account. I���ve heard the argument that families can���t afford plan C���s high deductibles and high out-of-pocket costs, and still have money left over to fund a health savings account. These folks often choose the higher-premium plan A to avoid these high potential costs.
The difference in premiums between plan A and plan C is a little over $7,200 annually. In 2021, the maximum allowable family contribution to a health savings account is $7,200. I thought I���d rather put my money into the tax-advantaged health savings account than spend it on higher premiums.
On other fronts, the plans seemed fairly similar. All three are with the same insurer, all covered preventive care and all give us access to the doctors we already see. In addition, we both have health savings accounts from our working years with enough funds to cover several years of out-of-pocket costs. Based on this analysis, we chose plan C, with our coverage starting Aug. 1.
What, then, was my mistake? My analysis was based on an entire year of premiums. Because we switched plans in August, we paid only five months of premiums in 2021. But the deductible and out-of-pocket maximum aren't pro-rated. You have to meet those in full, whether you���re in the plan for one month or 12.
This became apparent, in part, because we had higher medical costs this year. We moved to a new home in March, and are in the process of finding new doctors, setting up new patient appointments, and getting any tests or procedures they recommend. On top of that, my wife had a health issue that required several nights in the local hospital, plus follow-up tests and procedures. It was a minor scare and she���s doing fine.
With year-end rapidly approaching, it appears we will be close to meeting our family deductible of $6,000. It occurred to me that it might have been wiser to pay the higher premiums of plan A because it has a much lower annual deductible of $1,200. In a nutshell, if we had paid $3,020 more in premiums over five months, we could have saved even more on our annual deductible and out-of-pocket costs.
I revised my spreadsheet to reflect a five-month enrollment period and reran my analysis. It confirmed my hunch, at least in terms of the maximum total cost we could face. Plan A still has the highest minimum cost���but now it also has the lowest maximum cost. In addition, the deductible is lower and thus you start getting the 80% coinsurance payments sooner, but you don���t have to pay a year���s worth of higher premiums to gain this benefit.
The hardest part of this analysis is that you don���t know how healthy you���ll be in any given year. Only time will tell what our total medical costs will be in 2021. We both have doctor���s appointments before year-end, so bills are still coming in.
Perhaps we should have elected COBRA coverage and extended my wife���s employer plan for the rest of 2021. Since COBRA uses the same insurance policy that you had previously been using, your deductibles and out-of-pocket requirements don���t reset to zero just because you retire mid-year. The COBRA premiums were significantly higher than our other insurance options. That���s why, at the time, I assumed it wouldn���t be the better choice.
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.
But our recent experience, after switching health insurance mid-year, made me realize it was missing one important variable���the length of time you���ll be in the plan. If it���s less than a year, it can throw the analysis off.
We���d been using my wife���s employer���s medical insurance since 2017, when I stopped working fulltime. My wife retired in July, so we needed health insurance for the remaining five months of the year.
We could have extended her employer���s coverage with COBRA, but my retiree medical insurance plan seemed the better choice. Through it, we could enroll in one of three medical plans, with the company providing a subsidy based on a retiree���s years of service.
I contacted my retiree benefits service center and requested all the information on the three options. With that in hand, I created a spreadsheet to calculate the minimum and maximum annual costs for each plan. The minimum cost is calculated as 12 months of premium payments. The maximum cost is those premium payments, plus the potential out-of-pocket (OOP) maximum for the year.
Plan A was a preferred provider organization, plan B was a mid-priced high-deductible health plan (HDHP) and plan C was a low-priced HDHP. The table below summarizes the minimum and maximum annual cost for each plan for my wife and me. Although there���s about a $7,000 difference in the annual minimum cost���reflecting the difference in premiums���the maximum cost for the three plans is pretty similar.
If you expect to be healthy and not need medical care, plan C���which is the low-cost HDHP���makes the most sense. You���d pay the lowest premiums and you can contribute to a health savings account. I���ve heard the argument that families can���t afford plan C���s high deductibles and high out-of-pocket costs, and still have money left over to fund a health savings account. These folks often choose the higher-premium plan A to avoid these high potential costs.
The difference in premiums between plan A and plan C is a little over $7,200 annually. In 2021, the maximum allowable family contribution to a health savings account is $7,200. I thought I���d rather put my money into the tax-advantaged health savings account than spend it on higher premiums.
On other fronts, the plans seemed fairly similar. All three are with the same insurer, all covered preventive care and all give us access to the doctors we already see. In addition, we both have health savings accounts from our working years with enough funds to cover several years of out-of-pocket costs. Based on this analysis, we chose plan C, with our coverage starting Aug. 1.
What, then, was my mistake? My analysis was based on an entire year of premiums. Because we switched plans in August, we paid only five months of premiums in 2021. But the deductible and out-of-pocket maximum aren't pro-rated. You have to meet those in full, whether you���re in the plan for one month or 12.
This became apparent, in part, because we had higher medical costs this year. We moved to a new home in March, and are in the process of finding new doctors, setting up new patient appointments, and getting any tests or procedures they recommend. On top of that, my wife had a health issue that required several nights in the local hospital, plus follow-up tests and procedures. It was a minor scare and she���s doing fine.
With year-end rapidly approaching, it appears we will be close to meeting our family deductible of $6,000. It occurred to me that it might have been wiser to pay the higher premiums of plan A because it has a much lower annual deductible of $1,200. In a nutshell, if we had paid $3,020 more in premiums over five months, we could have saved even more on our annual deductible and out-of-pocket costs.
I revised my spreadsheet to reflect a five-month enrollment period and reran my analysis. It confirmed my hunch, at least in terms of the maximum total cost we could face. Plan A still has the highest minimum cost���but now it also has the lowest maximum cost. In addition, the deductible is lower and thus you start getting the 80% coinsurance payments sooner, but you don���t have to pay a year���s worth of higher premiums to gain this benefit.
The hardest part of this analysis is that you don���t know how healthy you���ll be in any given year. Only time will tell what our total medical costs will be in 2021. We both have doctor���s appointments before year-end, so bills are still coming in.
Perhaps we should have elected COBRA coverage and extended my wife���s employer plan for the rest of 2021. Since COBRA uses the same insurance policy that you had previously been using, your deductibles and out-of-pocket requirements don���t reset to zero just because you retire mid-year. The COBRA premiums were significantly higher than our other insurance options. That���s why, at the time, I assumed it wouldn���t be the better choice.
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 A Matter of Time appeared first on HumbleDollar.
December 19, 2021
Will Bulls Cheer?
THE HOLIDAYS MARK a festive period for stock market bulls. The final two weeks of the year and the first several trading sessions of January have historically seen unusually strong gains for the S&P 500 stocks, according to research from Bank of America. Since 1928, the final 10 trading days of December have averaged gains of 1.19% and the first 10 sessions of January have returned 0.72%.
Why has the S&P 500 performed well during this stretch? Increased holiday spending, a reversal of tax-loss harvesting and the anticipation of new money flowing into stocks come January are among the theories offered.
It���s no sure bet, though. Recall the last few weeks of 2018: The S&P 500 fell nearly 20% over a few months, culminating with big losses in December. Stocks bottomed on Christmas Eve that year and the usual pattern didn���t play out as many pundits expected.
Moreover, other so-called stock market��anomalies have faded over time as the market becomes wise to temporary trends. The January Effect is a well-known Wall Street phenomenon in which small-cap stocks, such as the shares in the Russell 2000 index, post big gains during the first month of the year. But we haven���t seen that big outperformance by small-caps in recent years.
The good news: Investors like you and me don���t have to play these games. Sticking with a regular investment schedule is more prudent than trying to get cute with week-to-week return patterns. My advice: Forget timing the market and instead do something useful, like making sure your 401(k), IRA and health savings account contributions are on track heading into 2022.
Why has the S&P 500 performed well during this stretch? Increased holiday spending, a reversal of tax-loss harvesting and the anticipation of new money flowing into stocks come January are among the theories offered.
It���s no sure bet, though. Recall the last few weeks of 2018: The S&P 500 fell nearly 20% over a few months, culminating with big losses in December. Stocks bottomed on Christmas Eve that year and the usual pattern didn���t play out as many pundits expected.
Moreover, other so-called stock market��anomalies have faded over time as the market becomes wise to temporary trends. The January Effect is a well-known Wall Street phenomenon in which small-cap stocks, such as the shares in the Russell 2000 index, post big gains during the first month of the year. But we haven���t seen that big outperformance by small-caps in recent years.
The good news: Investors like you and me don���t have to play these games. Sticking with a regular investment schedule is more prudent than trying to get cute with week-to-week return patterns. My advice: Forget timing the market and instead do something useful, like making sure your 401(k), IRA and health savings account contributions are on track heading into 2022.
The post Will Bulls Cheer? appeared first on HumbleDollar.
