Jonathan Clements's Blog, page 250
November 23, 2021
Rainy Days
ONE FALL DAY, my father and I were watching the rain ruin our outdoor plans. ���The one thing about rain,��� he said to me, ���is that there���s nothing you can do about it.���
My father was a go-getter. In 1941, he volunteered for the Army Air Corps right out of high school. He flew 35 missions in a B-17 Flying Fortress. After the war, he took over a local curtain manufacturing company operating in the red. He turned it into a curtain, drapery and bedspread empire with factories all around the country. He was no slouch.
Still, he recognized that there are times when things are just beyond our control. I���m not talking about systemic inequities, but those unexpected disruptions of our best-laid plans. We can fret, curse and diagram all the possible explanations on a wall using red yarn���or we can just do our best, accepting our limited control over life.
As a teacher, I walked into every class with a plan for what would be done. I also knew there was a good chance that a kid would have a meltdown or that a simple one-minute concept would actually require half the class time to teach.
My wife Jiab was a credit risk manager at a bank, so she���s good at anticipating ���what ifs.��� The difference between us, however, is that when the unexpected happens, her profession wants to know why it wasn���t anticipated. My profession assumes there are always unknowns that will upend a teacher's plans. The measure of success is how the teacher overcomes the inevitable disruptions.
We carried those traits into retirement. No one is better at planning a trip than Jiab. She���ll nail down every knowable detail, from flight to rooms.
I usually come alive once we get somewhere. I take the lay of the land, set a course and look for interesting sites. If the desired activity or place is unexpectedly unavailable, I quickly find an alternative. No sense fretting about it, we���ve just got to adjust and take the best path available.
The same thing is true for investments or any other decision about life. We need to plan like Jiab does. But if we overanalyze���or declare ���it wasn���t supposed to be this way������we can miss the departing lifeboats or the better opportunities available elsewhere. We can also miss a true beauty of life���the improvised dance to unexpected music that is, I���d argue, more fun.
By the way, I���m writing this on an unexpected rainy day. My tennis bag is sitting by the door, waiting for better weather. Nothing I can do about it.
My father was a go-getter. In 1941, he volunteered for the Army Air Corps right out of high school. He flew 35 missions in a B-17 Flying Fortress. After the war, he took over a local curtain manufacturing company operating in the red. He turned it into a curtain, drapery and bedspread empire with factories all around the country. He was no slouch.
Still, he recognized that there are times when things are just beyond our control. I���m not talking about systemic inequities, but those unexpected disruptions of our best-laid plans. We can fret, curse and diagram all the possible explanations on a wall using red yarn���or we can just do our best, accepting our limited control over life.
As a teacher, I walked into every class with a plan for what would be done. I also knew there was a good chance that a kid would have a meltdown or that a simple one-minute concept would actually require half the class time to teach.
My wife Jiab was a credit risk manager at a bank, so she���s good at anticipating ���what ifs.��� The difference between us, however, is that when the unexpected happens, her profession wants to know why it wasn���t anticipated. My profession assumes there are always unknowns that will upend a teacher's plans. The measure of success is how the teacher overcomes the inevitable disruptions.
We carried those traits into retirement. No one is better at planning a trip than Jiab. She���ll nail down every knowable detail, from flight to rooms.
I usually come alive once we get somewhere. I take the lay of the land, set a course and look for interesting sites. If the desired activity or place is unexpectedly unavailable, I quickly find an alternative. No sense fretting about it, we���ve just got to adjust and take the best path available.
The same thing is true for investments or any other decision about life. We need to plan like Jiab does. But if we overanalyze���or declare ���it wasn���t supposed to be this way������we can miss the departing lifeboats or the better opportunities available elsewhere. We can also miss a true beauty of life���the improvised dance to unexpected music that is, I���d argue, more fun.
By the way, I���m writing this on an unexpected rainy day. My tennis bag is sitting by the door, waiting for better weather. Nothing I can do about it.
The post Rainy Days appeared first on HumbleDollar.
Doing Trumps Owning
ONE OF MY FAVORITE tenets espoused on HumbleDollar is the emphasis on using our hard-earned money to buy experiences rather than possessions. As you get older, you feel like you have enough things. Indeed, my wife and I spent much of the past year getting rid of excess stuff when we downsized.
Meanwhile, the pandemic has put on hold some of the experiences we look forward to. Prior to 2020, in 24 of the previous 25 years, my wife���s family had held a reunion in the Outer Banks of North Carolina over the Thanksgiving week. Due to the pandemic, we skipped last year. We���re planning to reconvene this year, and the excitement is palpable. We���ll be 46 strong, representing four generations. We have two toddlers who were born since the last reunion in 2019. They���ll be meeting cousins, aunts and uncles for the first time.
As the family has grown, the size of the house we rent���and its price���have also grown. We���re now up to 27 bedrooms and about $13,000 for the week. We spilt the cost among the five families. I think it���s one of the year���s most worthwhile expenditures.
My wife and I, and our two adult sons and their wives, agreed years ago that we don���t need or want presents. But we try to find time to share experiences. Since both of our sons live in or near New York City, we���ve hosted the family at some Broadway shows. In January 2020, weeks before COVID-19 hit New York, we saw Come From Away on Broadway. It���s a wonderful show about how the people of Gander, Newfoundland, opened their town and homes to thousands of travelers who were diverted there on 9/11. Broadway prices are pretty high, but I always enjoy the amazing talent on display. Add to that a show that demonstrates the best in humanity, and I���m a satisfied customer.
We recently bought tickets to take our older grandsons to see Aladdin on Broadway. These, too, were expensive. They���ve also seen the Radio City Christmas Spectacular, but this will be their first Broadway show. We hope they���ll enjoy it���and it���ll be the start of a new tradition of experiences.
Meanwhile, the pandemic has put on hold some of the experiences we look forward to. Prior to 2020, in 24 of the previous 25 years, my wife���s family had held a reunion in the Outer Banks of North Carolina over the Thanksgiving week. Due to the pandemic, we skipped last year. We���re planning to reconvene this year, and the excitement is palpable. We���ll be 46 strong, representing four generations. We have two toddlers who were born since the last reunion in 2019. They���ll be meeting cousins, aunts and uncles for the first time.
As the family has grown, the size of the house we rent���and its price���have also grown. We���re now up to 27 bedrooms and about $13,000 for the week. We spilt the cost among the five families. I think it���s one of the year���s most worthwhile expenditures.
My wife and I, and our two adult sons and their wives, agreed years ago that we don���t need or want presents. But we try to find time to share experiences. Since both of our sons live in or near New York City, we���ve hosted the family at some Broadway shows. In January 2020, weeks before COVID-19 hit New York, we saw Come From Away on Broadway. It���s a wonderful show about how the people of Gander, Newfoundland, opened their town and homes to thousands of travelers who were diverted there on 9/11. Broadway prices are pretty high, but I always enjoy the amazing talent on display. Add to that a show that demonstrates the best in humanity, and I���m a satisfied customer.
We recently bought tickets to take our older grandsons to see Aladdin on Broadway. These, too, were expensive. They���ve also seen the Radio City Christmas Spectacular, but this will be their first Broadway show. We hope they���ll enjoy it���and it���ll be the start of a new tradition of experiences.
The post Doing Trumps Owning appeared first on HumbleDollar.
On the Move
AS WE GROW OLDER, maintaining the family home can become a burden. Eight years after I retired, my wife and I moved to a 2,000-square-foot condo. It���s about the same size as our old house. But it has no stairs, no basement���and no attic full of stuff. There���s also no exterior maintenance or landscaping work required of us.
I���ve been asking near-retirees how both downsizing and relocating figure into their retirement plans. Although there���s much talk about it, a majority of retirees don't move during retirement.
Several people I questioned had a unique way of assessing where to live. Visit local stores, they said, especially Walmart and Home Depot. They claimed it could tell you a lot about the community.
When I asked about downsizing and kids, l learned that my views are not typical. I say the kids leave the house when they marry. Or, if circumstances allow, they move out after they graduate college or have a fulltime job.
The alternate view I heard was that the kids are never moving back home once they���re off to college, so downsizing is immediate. A few people took the concept even further, saying there���s no more room at the inn right after high school graduation.
Family and friends are important considerations. One woman said they had always planned to retire to the South. And they did���when there were no grandkids. Once the grandchildren arrived, they reversed course and headed back north.
I recently played golf with an 85-year-old who has been married 63 years. For the past 13 years, he and his wife have lived in a 55-plus condo community similar to mine. He enjoyed playing pool and cards with friends there. Then his wife decided she wanted to move 50 miles closer to the children. We live in an apartment, he said with a tinge of regret, and hardly ever see the kids.
Here���s an interesting���and thoughtful���perspective. One person said he would never move far from his children. Why? As we age, we may need help, most likely from our children. It would be stressful for them if they were hundreds���or thousands���of miles away.
Among those who move, relocating boils down to a few main objectives:
Better weather. I understand seeking better weather, especially to avoid northern winters. Better weather has its tradeoffs, however. Warmer winters often mean blistering hot and humid summers. Still, I have yet to find anyone who feels sizzling Florida summers outweigh the benefits of warmer winters with no snow.
Lower costs. If lower spending is a necessity, relocation is a viable option, especially if you���re moving from the Northeast, or a coastal state, to the South.
There are tradeoffs for that lower cost of living, however. Areas with lower costs typically have lower incomes, too. There can be fewer public services and less spent on education, although the latter may not be too significant for a retiree.
One fellow I asked about relocating said, ���Save enough to live where you want. But there���s a big difference between Paris, France, and Paris, Texas.���
For those serious about retirement planning, one goal should be to avoid relocating out of financial necessity. Moving under financial stress may mean you can���t return to your old home base if things don���t work out as planned.
Lower taxes. Retirees heading to Florida delight in not having to pay state income taxes. But that doesn���t mean there are no taxes or fees. There are only nine states without an income tax and, of these, only Florida is a major draw for retirees. At the other end of the spectrum, 12 states with a state income tax also tax Social Security benefits.
If taxes are a reason for relocating, all taxes should be considered. This includes taxes on income, state and local sales taxes, property, estate and inheritance taxes���even the tax on gasoline. A state needs revenue, and it���ll get it somewhere.
A WalletHub tax survey says 38% of people would move to a different country for a tax-free future. That seems a bit drastic to me.
Safety. For some, the crime rate is a consideration. Looking at the��data, I was fooled. Some states popularly associated with crime actually have low rates. For example, New Jersey is lower in crime than 44 other states, including the relocation destinations of South Carolina and Florida.
A woman told me, ���We moved south to Myrtle Beach. Too much crime. We moved back north, close to our daughter and granddaughters. It was an expensive lesson.���
My wife and I are never moving far from our children and grandchildren. We would save $10,000 a year in property taxes alone if we moved fulltime to our vacation home on Cape Cod. But that was never an option. It���s five-and-a-half hours and 300 miles away from the people most important to us.
Money may be the primary consideration in retirement planning. But where you choose to live, and why, is close behind. If you get it wrong, the consequences may be as dire as underfunding your retirement.
Richard Quinn blogs at QuinnsCommentary.net. Before retiring in 2010, Dick was a compensation and benefits executive.��Follow him on Twitter��@QuinnsComments��and check out his earlier��articles.
The post On the Move appeared first on HumbleDollar.
November 22, 2021
Making Contact
I TURN 70 IN JANUARY and my wife just turned 65. I recently applied for my Social Security benefits, and got her kicked off with Medicare. I needed to call both agencies. What a contrast I���ve seen in their responsiveness.
As I���ve conceded before, I���m a bit of a fanatic when it comes to this topic.
We set up my wife���s online Medicare account, and she designated me as her ���authorized representative.��� Like most couples, we divide the labor, and one of my assignments is handling all medical and insurance accounts.
I wanted to pay her premiums quarterly, and have them align with my premium payment schedule. That required first changing her payments to monthly for one month, and then back to quarterly. For the sake of bill paying convenience, I gave it a whirl.
I called Medicare, got the usual robot, and chose the ���call back��� option. I received a call within minutes. The rep immediately saw my ���authorized representative��� designation, understood my request, and said it would be sent to the ���Advanced Resolution Center��� for action.
Eight days later, I called back and spoke to a different rep, who was equally polite and helpful. He told me my request had been granted and my wife���s billing would now be monthly.
As soon as I received her monthly Medicare bill, I paid it. Then, a few days later, I called Medicare to request a change back to quarterly billing. I spoke with a third rep, who was as polite and helpful as the previous two, and she processed my request.
Finally, about a week later, I called Medicare and spoke to a fourth rep, who was likewise courteous and helpful. She confirmed my wife had now been switched back to quarterly billing.
I was a happy camper. Now I can pay both our Medicare premiums once a quarter, as well as our Medigap and Part D premiums, which were already in sync. The Medicare folks made it all pleasant and easy.
My wife thinks I���m crazy to have gone to all this trouble just to have perfectly aligned Medicare bills, but I doubt she���s surprised. She���s been living with an OCD husband for 33 years.
Now, the dark side: I submitted my online application for Social Security benefits four months before my birthday, as recommended. My online Social Security account indicates that a review of my application began on Sept. 10. For most people, that takes two to four weeks.
My application is simple, so when I saw no progress after six weeks, I called the field office where my review is pending. The first few times I couldn���t get past the phone robot from hell.
When I finally did, a receptionist gave me the extension for the employee reviewing my application. After several attempts over the last couple of weeks, I���ve neither gotten through to her nor had a call back, despite leaving polite voicemails.
What a difference an agency makes.
As I���ve conceded before, I���m a bit of a fanatic when it comes to this topic.
We set up my wife���s online Medicare account, and she designated me as her ���authorized representative.��� Like most couples, we divide the labor, and one of my assignments is handling all medical and insurance accounts.
I wanted to pay her premiums quarterly, and have them align with my premium payment schedule. That required first changing her payments to monthly for one month, and then back to quarterly. For the sake of bill paying convenience, I gave it a whirl.
I called Medicare, got the usual robot, and chose the ���call back��� option. I received a call within minutes. The rep immediately saw my ���authorized representative��� designation, understood my request, and said it would be sent to the ���Advanced Resolution Center��� for action.
Eight days later, I called back and spoke to a different rep, who was equally polite and helpful. He told me my request had been granted and my wife���s billing would now be monthly.
As soon as I received her monthly Medicare bill, I paid it. Then, a few days later, I called Medicare to request a change back to quarterly billing. I spoke with a third rep, who was as polite and helpful as the previous two, and she processed my request.
Finally, about a week later, I called Medicare and spoke to a fourth rep, who was likewise courteous and helpful. She confirmed my wife had now been switched back to quarterly billing.
I was a happy camper. Now I can pay both our Medicare premiums once a quarter, as well as our Medigap and Part D premiums, which were already in sync. The Medicare folks made it all pleasant and easy.
My wife thinks I���m crazy to have gone to all this trouble just to have perfectly aligned Medicare bills, but I doubt she���s surprised. She���s been living with an OCD husband for 33 years.
Now, the dark side: I submitted my online application for Social Security benefits four months before my birthday, as recommended. My online Social Security account indicates that a review of my application began on Sept. 10. For most people, that takes two to four weeks.
My application is simple, so when I saw no progress after six weeks, I called the field office where my review is pending. The first few times I couldn���t get past the phone robot from hell.
When I finally did, a receptionist gave me the extension for the employee reviewing my application. After several attempts over the last couple of weeks, I���ve neither gotten through to her nor had a call back, despite leaving polite voicemails.
What a difference an agency makes.
The post Making Contact appeared first on HumbleDollar.
College Math
WHAT���S THE REAL PRICE? In September, I wrote about the potential tab for sending our first child to college in 2025. The four-year cost was estimated at anywhere from $65,000 to $430,000, depending on the college chosen.
This wild disparity led me to conclude that college financial planning was like saving to buy a car���when you don���t know if you���ll drive off the lot in a Honda or a Lamborghini.
Since then, I���ve tried to put a sharper pencil to college costs. I had the help of an expert on student financial aid, who advised me to complete the��Federal Student Aid Estimator. This government calculator yields your expected family contribution, or EFC. This is the annual amount families are expected to pay for tuition, room and board, books and other college costs.
To get apples-to-apples comparisons, I used the following factors in all my calculations:
Family size: four, with one child entering college.
Annual income: two adults making $120,000 combined.
Non-retirement investment accounts: $250,000.
Home value: $500,000 with a $350,000 mortgage.
Student performance: top 15% in grades, as well as SAT and ACT test scores.
When I plugged these factors into the Federal Student Aid Estimator, it said the expected family contribution would be $36,000 per year. If you assume a student will borrow $5,500 to $7,500 per year���the federal direct loan limits���then the family would have to pay roughly $30,000 a year for college.
That���s a steep price. It represents 25% of the hypothetical family���s annual pre-tax income. Or, if paid from savings, four years of college costs would eat up nearly half their $250,000 in non-retirement investments.
To get a more precise estimate, I was advised by my college-finance expert to try the net price calculators available on the websites of all U.S. colleges. These calculators offer a wealth of data.
To start, they provide a college���s undiscounted all-in cost. Next, they estimate the scholarships and loans a student might receive. What���s finally left is the estimated price a family might pay out of pocket for a year of schooling.
In running my experiment, I selected 20 schools: 10 private schools, five public in-state California schools and five out-of-state public colleges. Across the 20 colleges, the average annual all-in cost was $54,000 a year, with a range from $24,000 to $82,000.
With scholarships and loans factored in, the average price dropped to $35,000 annually for our hypothetical family. The cost ranged from $17,000 to $54,000 a year, depending on the school.
While this range is wide, 13 of the 20 schools had an annual family cost of between $30,000 and $40,000. That suggests that the Federal Student Aid Estimator gives a good idea of what college will typically cost a family.
Many families assume that in-state public universities will provide the lowest-cost education. From my experiment, I learned this isn���t necessarily so, at least here in California. Here���s how costs compared across the different groups of schools I sampled:
Private colleges. For the 10 private schools, the average annual undiscounted cost was a whopping $69,000 annually. But the sticker price doesn���t tell the true story. For our hypothetical family, private schools offer big discounts, averaging 44%, making them competitive with top in-state public schools. After the discount, the cost fell to $39,000 a year, on average.
Among the 10 private schools, the discounted cost ranged from $27,000 to $47,000, with seven schools between $34,000 and $44,000. In my experiment, private schools had the highest family cost, on average. But that wasn���t true across the board. Some top private schools���including Duke and Georgetown���had net prices that were comparable to the cost of public in-state schools.
Public in-state schools. For the five in-state California public colleges, the average annual undiscounted cost was a reasonable $30,000. The average discount, however, was only 3%. This led to an average family cost of $29,000 per year. Prices ranged from $21,000 to $36,000, depending on the school. In-state schools cost less than private schools���but my experiment wasn���t done yet.
Public out-of-state schools. Among the five schools I selected, the average undiscounted college cost was $48,000, with a range from $39,000 to $57,000 a year. These colleges offered big discounts to our hypothetical out-of-state student, with an average discount of 31%. After the discounts, the average family cost fell to $34,000 annually���still higher than California public colleges��� $29,000.
The discount range among these schools was enormous, however, ranging from 6% to 69%. After the discounts were applied, the expected family cost fell to $17,000 to $54,000 annually. The surprising conclusion: For our hypothetical family, the lowest-cost school was an out-of-state public institution, the University of Wisconsin.
My advice: If you know the schools your child might want to attend, complete the net price calculators for those institutions. If you don���t have a short list of schools yet, the Federal Student Aid Estimator will give you a reasonable estimate of what your child���s college education could cost you.
While my experiment found that the range of costs was narrower than the published prices suggest, the potential cost is still alarmingly high���roughly $35,000 a year, on average. If you���re fortunate enough to be in a better financial position than the hypothetical family I chose, you should be prepared to pay even more.
Kyle McIntosh, CPA, MBA, is a fulltime lecturer at the California Lutheran University School of Management. He turned his career focus to teaching after 23 years working in accounting and finance roles for large corporations. Kyle lives in Southern California with his wife, two children and their overly friendly goldendoodle. Follow Kyle on Twitter @KyleGMcIntosh��and check out his earlier articles.
This wild disparity led me to conclude that college financial planning was like saving to buy a car���when you don���t know if you���ll drive off the lot in a Honda or a Lamborghini.
Since then, I���ve tried to put a sharper pencil to college costs. I had the help of an expert on student financial aid, who advised me to complete the��Federal Student Aid Estimator. This government calculator yields your expected family contribution, or EFC. This is the annual amount families are expected to pay for tuition, room and board, books and other college costs.
To get apples-to-apples comparisons, I used the following factors in all my calculations:
Family size: four, with one child entering college.
Annual income: two adults making $120,000 combined.
Non-retirement investment accounts: $250,000.
Home value: $500,000 with a $350,000 mortgage.
Student performance: top 15% in grades, as well as SAT and ACT test scores.
When I plugged these factors into the Federal Student Aid Estimator, it said the expected family contribution would be $36,000 per year. If you assume a student will borrow $5,500 to $7,500 per year���the federal direct loan limits���then the family would have to pay roughly $30,000 a year for college.
That���s a steep price. It represents 25% of the hypothetical family���s annual pre-tax income. Or, if paid from savings, four years of college costs would eat up nearly half their $250,000 in non-retirement investments.
To get a more precise estimate, I was advised by my college-finance expert to try the net price calculators available on the websites of all U.S. colleges. These calculators offer a wealth of data.
To start, they provide a college���s undiscounted all-in cost. Next, they estimate the scholarships and loans a student might receive. What���s finally left is the estimated price a family might pay out of pocket for a year of schooling.
In running my experiment, I selected 20 schools: 10 private schools, five public in-state California schools and five out-of-state public colleges. Across the 20 colleges, the average annual all-in cost was $54,000 a year, with a range from $24,000 to $82,000.
With scholarships and loans factored in, the average price dropped to $35,000 annually for our hypothetical family. The cost ranged from $17,000 to $54,000 a year, depending on the school.
While this range is wide, 13 of the 20 schools had an annual family cost of between $30,000 and $40,000. That suggests that the Federal Student Aid Estimator gives a good idea of what college will typically cost a family.
Many families assume that in-state public universities will provide the lowest-cost education. From my experiment, I learned this isn���t necessarily so, at least here in California. Here���s how costs compared across the different groups of schools I sampled:
Private colleges. For the 10 private schools, the average annual undiscounted cost was a whopping $69,000 annually. But the sticker price doesn���t tell the true story. For our hypothetical family, private schools offer big discounts, averaging 44%, making them competitive with top in-state public schools. After the discount, the cost fell to $39,000 a year, on average.
Among the 10 private schools, the discounted cost ranged from $27,000 to $47,000, with seven schools between $34,000 and $44,000. In my experiment, private schools had the highest family cost, on average. But that wasn���t true across the board. Some top private schools���including Duke and Georgetown���had net prices that were comparable to the cost of public in-state schools.
Public in-state schools. For the five in-state California public colleges, the average annual undiscounted cost was a reasonable $30,000. The average discount, however, was only 3%. This led to an average family cost of $29,000 per year. Prices ranged from $21,000 to $36,000, depending on the school. In-state schools cost less than private schools���but my experiment wasn���t done yet.
Public out-of-state schools. Among the five schools I selected, the average undiscounted college cost was $48,000, with a range from $39,000 to $57,000 a year. These colleges offered big discounts to our hypothetical out-of-state student, with an average discount of 31%. After the discounts, the average family cost fell to $34,000 annually���still higher than California public colleges��� $29,000.
The discount range among these schools was enormous, however, ranging from 6% to 69%. After the discounts were applied, the expected family cost fell to $17,000 to $54,000 annually. The surprising conclusion: For our hypothetical family, the lowest-cost school was an out-of-state public institution, the University of Wisconsin.
My advice: If you know the schools your child might want to attend, complete the net price calculators for those institutions. If you don���t have a short list of schools yet, the Federal Student Aid Estimator will give you a reasonable estimate of what your child���s college education could cost you.
While my experiment found that the range of costs was narrower than the published prices suggest, the potential cost is still alarmingly high���roughly $35,000 a year, on average. If you���re fortunate enough to be in a better financial position than the hypothetical family I chose, you should be prepared to pay even more.
Kyle McIntosh, CPA, MBA, is a fulltime lecturer at the California Lutheran University School of Management. He turned his career focus to teaching after 23 years working in accounting and finance roles for large corporations. Kyle lives in Southern California with his wife, two children and their overly friendly goldendoodle. Follow Kyle on Twitter @KyleGMcIntosh��and check out his earlier articles.The post College Math appeared first on HumbleDollar.
November 21, 2021
Beware of Bears
THE BOND MARKET has had a turbulent year. Interest rates, which move in the opposite direction of bond prices, spiked in early 2021 on hopes of an economic reopening. The 10-year Treasury yield, which started the year under 1%, surged above 1.75% in March, before subsiding in the second quarter and the third quarter���s initial weeks.
Today, 10-year Treasury buyers can earn a smidgen more than 1.5%, far less than the 6.2% inflation rate. Those with significant bond holdings might be apprehensive about such a negative real yield. Unfortunately, if we want higher interest rates, there isn���t much we can do except increase our portfolio���s risk.
Things are no better overseas. Bank of America notes that global high-quality corporate fixed-income securities are on pace to lose 4% this year, factoring in both the interest earned and bond price declines. Meanwhile, world government bonds are on track for their worst year since 1949.
The funny thing about all these year-to-date statistics is that the starting point makes all the difference. Bond returns are positive across the board over the past six months. Vanguard Long-Term Treasury ETF (symbol: VGLT) has returned 6%. Even Vanguard Emerging Markets Government Bond ETF (VWOB) has eked out a 0.9% gain. Shifting the time period analyzed shifts the narrative.
Now is the time of year when the next-year forecasts trickle in from Wall Street economists and market analysts. Like clockwork, economists will probably forecast higher interest rates in 2022. These ���expert��� predictions might make you even more skittish about holding bonds. But consider this chart: ���Bond bearishness has been a constant for decades, and horribly wrong for decades,��� as researcher Jim Bianco put it last Friday.
Today, 10-year Treasury buyers can earn a smidgen more than 1.5%, far less than the 6.2% inflation rate. Those with significant bond holdings might be apprehensive about such a negative real yield. Unfortunately, if we want higher interest rates, there isn���t much we can do except increase our portfolio���s risk.
Things are no better overseas. Bank of America notes that global high-quality corporate fixed-income securities are on pace to lose 4% this year, factoring in both the interest earned and bond price declines. Meanwhile, world government bonds are on track for their worst year since 1949.
The funny thing about all these year-to-date statistics is that the starting point makes all the difference. Bond returns are positive across the board over the past six months. Vanguard Long-Term Treasury ETF (symbol: VGLT) has returned 6%. Even Vanguard Emerging Markets Government Bond ETF (VWOB) has eked out a 0.9% gain. Shifting the time period analyzed shifts the narrative.
Now is the time of year when the next-year forecasts trickle in from Wall Street economists and market analysts. Like clockwork, economists will probably forecast higher interest rates in 2022. These ���expert��� predictions might make you even more skittish about holding bonds. But consider this chart: ���Bond bearishness has been a constant for decades, and horribly wrong for decades,��� as researcher Jim Bianco put it last Friday.
The post Beware of Bears appeared first on HumbleDollar.
Cheap to Cheaper
BORED ONE WEEKEND, I took up actor Ryan Reynolds on his offer to switch cellphone carriers. Frugal guy that I am, I���d been a loyal Republic Wireless subscriber for several years before my recent change. My new plan is on the Mint Mobile platform.
Perhaps you���ve seen Mint���s commercials on NFL Sunday or when perusing YouTube videos, with its offer of four gigabytes of data with unlimited text and calls. This will cost me a measly $201 a year, including taxes and fees. That isn't a huge savings from Republic���s service, which costs $243 all-in, but the three extra gigabytes are a nice feature, so I don���t have to be mindful of going over my data limit and incurring fees.
I���m not advocating readers switch to this ultra-low-cost cellphone plan provider to save such a paltry sum. So far, however, I���m quite pleased with the no-frills and dirt-cheap service Mint delivers. The transition from Republic to Mint was also easy. Mint sent me a kit with a SIM card. I popped it in and was off to the races after just a few hours of being without service.
Kudos to Republic, though. My former carrier was kind enough to reimburse the few weeks of coverage I'd already paid for when I went to cancel. In an economy with rising prices everywhere, it���s great that a cellphone bill can be so small.
If you���re in the market for a new, lower-cost cellphone plan, consider Mint. What shall I do with the whopping $42 annual cost cut? Maybe I���ll embark on one of my favorite indulgences���a trip to the Brazilian steakhouse.
Perhaps you���ve seen Mint���s commercials on NFL Sunday or when perusing YouTube videos, with its offer of four gigabytes of data with unlimited text and calls. This will cost me a measly $201 a year, including taxes and fees. That isn't a huge savings from Republic���s service, which costs $243 all-in, but the three extra gigabytes are a nice feature, so I don���t have to be mindful of going over my data limit and incurring fees.
I���m not advocating readers switch to this ultra-low-cost cellphone plan provider to save such a paltry sum. So far, however, I���m quite pleased with the no-frills and dirt-cheap service Mint delivers. The transition from Republic to Mint was also easy. Mint sent me a kit with a SIM card. I popped it in and was off to the races after just a few hours of being without service.
Kudos to Republic, though. My former carrier was kind enough to reimburse the few weeks of coverage I'd already paid for when I went to cancel. In an economy with rising prices everywhere, it���s great that a cellphone bill can be so small.
If you���re in the market for a new, lower-cost cellphone plan, consider Mint. What shall I do with the whopping $42 annual cost cut? Maybe I���ll embark on one of my favorite indulgences���a trip to the Brazilian steakhouse.
The post Cheap to Cheaper appeared first on HumbleDollar.
Four or Less
A RECENT ARTICLE from Morningstar suggested that the 4% rule for sustainable retirement withdrawals should be revised downward to 3.3%. This lower rate, the researchers argued, is safer given today’s rich stock market valuations and low bond yields.
The article also recommended being flexible with withdrawals, by taking larger amounts in good markets and smaller withdrawals during down periods. This strategy could provide more lifetime income than fixing a withdrawal amount in the first year and then automatically increasing that sum each year with inflation.
I like simple rules of thumb, but I only use them as ballpark estimates. The old 4% rule provides a quick, back-of-the-envelope sense of our retirement readiness. For instance, if we divide 100 by that 4%, we get 25. The upshot: If we have savings equal to 25 times our average annual spending, or something in that range, we may have enough to quit the workforce. For younger folks, I’d bump up the multiplier in recognition of longer life expectancies.
What if our retirement readiness passes this simple sniff-test? Now, it’s time for detailed calculations using individually tailored parameters. A ballpark estimate is not helpful at this stage.
My unease with the 4% rule—and I’m not alone—isn't with the number’s accuracy. Rather, I’m uncomfortable with its widespread use as a one-size-fits-all withdrawal strategy. And, no, tweaking the recommended withdrawal rate up or down from a nice whole number to a decimal figure doesn’t necessarily make it more correct. Rather, it can simply create a stronger illusion of accuracy.
“Everything should be made as simple as possible, but not simpler,” as Albert Einstein may have said. Withdrawal strategies in retirement needn't be too complicated. But a prescribed withdrawal rate—even with some adjustments here or there—strikes me as an over-simplified endeavor.
The article also recommended being flexible with withdrawals, by taking larger amounts in good markets and smaller withdrawals during down periods. This strategy could provide more lifetime income than fixing a withdrawal amount in the first year and then automatically increasing that sum each year with inflation.
I like simple rules of thumb, but I only use them as ballpark estimates. The old 4% rule provides a quick, back-of-the-envelope sense of our retirement readiness. For instance, if we divide 100 by that 4%, we get 25. The upshot: If we have savings equal to 25 times our average annual spending, or something in that range, we may have enough to quit the workforce. For younger folks, I’d bump up the multiplier in recognition of longer life expectancies.
What if our retirement readiness passes this simple sniff-test? Now, it’s time for detailed calculations using individually tailored parameters. A ballpark estimate is not helpful at this stage.
My unease with the 4% rule—and I’m not alone—isn't with the number’s accuracy. Rather, I’m uncomfortable with its widespread use as a one-size-fits-all withdrawal strategy. And, no, tweaking the recommended withdrawal rate up or down from a nice whole number to a decimal figure doesn’t necessarily make it more correct. Rather, it can simply create a stronger illusion of accuracy.
“Everything should be made as simple as possible, but not simpler,” as Albert Einstein may have said. Withdrawal strategies in retirement needn't be too complicated. But a prescribed withdrawal rate—even with some adjustments here or there—strikes me as an over-simplified endeavor.
The post Four or Less appeared first on HumbleDollar.
Taking Stock
A FRIEND DESCRIBED his recent experience trying to buy a new car. “I had two choices,” he said. “One dealer wanted full sticker price. The other wanted even more. It wasn’t much of a choice.”
The inflation situation in the car market is well understood. A shortage of components is limiting car makers’ output, driving up prices. But inflationary pressures aren’t limited to cars. The most recent reading for the Consumer Price Index was higher than it’s been in 30 years. In an article last week, The Wall Street Journal described how manufacturers of everything from handbags to fertilizer have been raising prices due to labor shortages and a snarled supply chain. It's not a good situation.
But the Journal also noted a less publicized element of this story: Many companies, it turns out, are taking advantage of the situation to push through price increases that are over and above what would be warranted by their own higher costs. The result: Two-thirds of big companies are now enjoying higher profit margins than before the pandemic. For them, it's been a banner year. For investors, this highlights four important lessons:
1. Investment markets are like a billiards table. I often quote investor-author Nassim Nicholas Taleb, who likens investment markets to a billiards table: When you hit the first ball, you can be pretty sure where it’s going to go. Skilled players can control what will happen when the first ball hits the second. But beyond that, it’s anyone’s guess. Things are just too random. In the investment markets, we’ve seen that dynamic in living color this year.
In 2020, when the economy ground to a halt at the beginning of the pandemic, inflation nearly went negative. At the depth of the recession, no one that I know of predicted anything like the recovery we’ve experienced. Even Warren Buffett miscalculated. When it looked like we might be in a work-from-home world forever, Buffett said that he sold out of all of his airline stocks, taking multi-billion dollar losses. With the benefit of hindsight, that was exactly the wrong move. But no one could have known that at the time.
Similarly, no one knew that multiple rounds of government stimulus would leave people flush with cash, and that months of isolation would make them more eager to spend. No one could have foreseen that a shortage would develop in the semiconductor industry and that it would create a bottleneck for thousands of downstream products. No one could have foreseen that the backlog of container ships waiting off the coast of Los Angeles would now stretch all the way to San Diego, more than 100 miles south. No one could have foreseen how the resulting shortages would allow companies to boost their profitability. And perhaps most of all, no one could have foreseen “the great resignation” that's resulted in millions of unfilled jobs.
Taleb’s billiards analogy couldn't be more apt. I take this as a reminder, once again, that the prediction game is perilous. Why am I repeating this observation, one I've made many times before? Because I fully acknowledge how hard it is to avoid making predictions. Whether it's an economic, political or geopolitical event, sometimes a risk just seems so clear. That makes it awfully hard to avoid taking action. I recognize that.
But that's why I think it's so important to follow stories like the one we've witnessed over the past year. If the world were simpler and more linear, predictions might be worthwhile. But the economy is not linear. It's a billiards table.
2. There are limits to even the Fed’s power. A while back, Federal Reserve Chair Jerome Powell described the current bout of inflation as “transitory.” While he didn't precisely define that term, many are questioning whether he still believes that or if inflation has now started to take on a life of its own. I don't claim to have an answer to this question. There's too much conflicting data. But the Journal's observation—that companies are now hiking prices not because they need to, but because they can—reveals how tricky inflation can be.
It may be that Powell was right when he made his initial “transitory” comment. The numbers supported his view. What he wasn’t counting on, though, was the human element. The word “inflation” is now in the news so frequently that businesses are taking matters into their own hands, preemptively raising prices. To some degree, this is a defensive move to offset their own rising costs. But to an increasing degree, it’s now also offensive. Companies are using the current situation as cover to do what they otherwise couldn't have gotten away with.
Taken together, this year's inflation story reveals that there are limits to even the Fed’s power. To be sure, the Fed did famously break the back of inflation in the early 1980s. But it wasn't easy.
3. Stocks can be a good inflation hedge. In recent months, there's been a lot of discussion about inflation-linked government bonds. If you've held either inflation-indexed Treasurys or Series I savings bonds over the past year, you've probably done quite well. But investors often overlook a more obvious and potentially much more profitable way to protect against inflation: stocks. As I've noted before, all things being equal, a company's share price should climb along with the prices of its products. That, I think, explains part of the stock market's rise this year.
Yes, there are situations in which inflation hurts the stock market. Historically, the market has delivered lower returns during periods when inflation has been high. But even accounting for those lower-return periods, stocks have delivered far better returns than bonds over time.
Stocks have also delivered demonstrably better returns than gold, which has a reputation—undeserved, in my opinion—of providing inflation protection. That's why, even if you think inflation will keep going, I still wouldn't recommend any drastic change to your portfolio. The stocks you already own may do the job quite well.
4. “Rules” in economics are rarely rules. The financial world relies heavily on rules of thumb. But these often rest on shaky footing. One example, as I noted, is the notion that gold is an effective hedge against inflation. That notion stems from the fact that there have been periods when inflation was high and, at the same time, gold prices were rising. But the relationship between gold prices and inflation reminds me of the broken clock that’s right twice a day. Multiple studies, including one titled "The Golden Dilemma," have looked at this question. The data is clear: Despite its reputation, gold is not the inflation hedge it’s perceived to be.
Another rule of thumb that’s been turned on its head this year: The idea that higher inflation punishes growth stocks. This notion is grounded in logic. A company’s share price should, in theory, reflect the present value of all future profits. Because of that, higher inflation is more corrosive to the value of faster growing companies because future profits represent a greater portion of their total value. And yet, this year, with inflation as high as it’s been in a generation, growth stocks like Microsoft, Tesla and Alphabet (a.k.a. Google) have far outpaced the overall market. That’s why I view rules of thumb as interesting, but hardly reliable.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.
The inflation situation in the car market is well understood. A shortage of components is limiting car makers’ output, driving up prices. But inflationary pressures aren’t limited to cars. The most recent reading for the Consumer Price Index was higher than it’s been in 30 years. In an article last week, The Wall Street Journal described how manufacturers of everything from handbags to fertilizer have been raising prices due to labor shortages and a snarled supply chain. It's not a good situation.
But the Journal also noted a less publicized element of this story: Many companies, it turns out, are taking advantage of the situation to push through price increases that are over and above what would be warranted by their own higher costs. The result: Two-thirds of big companies are now enjoying higher profit margins than before the pandemic. For them, it's been a banner year. For investors, this highlights four important lessons:
1. Investment markets are like a billiards table. I often quote investor-author Nassim Nicholas Taleb, who likens investment markets to a billiards table: When you hit the first ball, you can be pretty sure where it’s going to go. Skilled players can control what will happen when the first ball hits the second. But beyond that, it’s anyone’s guess. Things are just too random. In the investment markets, we’ve seen that dynamic in living color this year.
In 2020, when the economy ground to a halt at the beginning of the pandemic, inflation nearly went negative. At the depth of the recession, no one that I know of predicted anything like the recovery we’ve experienced. Even Warren Buffett miscalculated. When it looked like we might be in a work-from-home world forever, Buffett said that he sold out of all of his airline stocks, taking multi-billion dollar losses. With the benefit of hindsight, that was exactly the wrong move. But no one could have known that at the time.
Similarly, no one knew that multiple rounds of government stimulus would leave people flush with cash, and that months of isolation would make them more eager to spend. No one could have foreseen that a shortage would develop in the semiconductor industry and that it would create a bottleneck for thousands of downstream products. No one could have foreseen that the backlog of container ships waiting off the coast of Los Angeles would now stretch all the way to San Diego, more than 100 miles south. No one could have foreseen how the resulting shortages would allow companies to boost their profitability. And perhaps most of all, no one could have foreseen “the great resignation” that's resulted in millions of unfilled jobs.
Taleb’s billiards analogy couldn't be more apt. I take this as a reminder, once again, that the prediction game is perilous. Why am I repeating this observation, one I've made many times before? Because I fully acknowledge how hard it is to avoid making predictions. Whether it's an economic, political or geopolitical event, sometimes a risk just seems so clear. That makes it awfully hard to avoid taking action. I recognize that.
But that's why I think it's so important to follow stories like the one we've witnessed over the past year. If the world were simpler and more linear, predictions might be worthwhile. But the economy is not linear. It's a billiards table.
2. There are limits to even the Fed’s power. A while back, Federal Reserve Chair Jerome Powell described the current bout of inflation as “transitory.” While he didn't precisely define that term, many are questioning whether he still believes that or if inflation has now started to take on a life of its own. I don't claim to have an answer to this question. There's too much conflicting data. But the Journal's observation—that companies are now hiking prices not because they need to, but because they can—reveals how tricky inflation can be.
It may be that Powell was right when he made his initial “transitory” comment. The numbers supported his view. What he wasn’t counting on, though, was the human element. The word “inflation” is now in the news so frequently that businesses are taking matters into their own hands, preemptively raising prices. To some degree, this is a defensive move to offset their own rising costs. But to an increasing degree, it’s now also offensive. Companies are using the current situation as cover to do what they otherwise couldn't have gotten away with.
Taken together, this year's inflation story reveals that there are limits to even the Fed’s power. To be sure, the Fed did famously break the back of inflation in the early 1980s. But it wasn't easy.
3. Stocks can be a good inflation hedge. In recent months, there's been a lot of discussion about inflation-linked government bonds. If you've held either inflation-indexed Treasurys or Series I savings bonds over the past year, you've probably done quite well. But investors often overlook a more obvious and potentially much more profitable way to protect against inflation: stocks. As I've noted before, all things being equal, a company's share price should climb along with the prices of its products. That, I think, explains part of the stock market's rise this year.
Yes, there are situations in which inflation hurts the stock market. Historically, the market has delivered lower returns during periods when inflation has been high. But even accounting for those lower-return periods, stocks have delivered far better returns than bonds over time.
Stocks have also delivered demonstrably better returns than gold, which has a reputation—undeserved, in my opinion—of providing inflation protection. That's why, even if you think inflation will keep going, I still wouldn't recommend any drastic change to your portfolio. The stocks you already own may do the job quite well.
4. “Rules” in economics are rarely rules. The financial world relies heavily on rules of thumb. But these often rest on shaky footing. One example, as I noted, is the notion that gold is an effective hedge against inflation. That notion stems from the fact that there have been periods when inflation was high and, at the same time, gold prices were rising. But the relationship between gold prices and inflation reminds me of the broken clock that’s right twice a day. Multiple studies, including one titled "The Golden Dilemma," have looked at this question. The data is clear: Despite its reputation, gold is not the inflation hedge it’s perceived to be.
Another rule of thumb that’s been turned on its head this year: The idea that higher inflation punishes growth stocks. This notion is grounded in logic. A company’s share price should, in theory, reflect the present value of all future profits. Because of that, higher inflation is more corrosive to the value of faster growing companies because future profits represent a greater portion of their total value. And yet, this year, with inflation as high as it’s been in a generation, growth stocks like Microsoft, Tesla and Alphabet (a.k.a. Google) have far outpaced the overall market. That’s why I view rules of thumb as interesting, but hardly reliable.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.The post Taking Stock appeared first on HumbleDollar.
November 20, 2021
Travel Tips
WE WENT TO NEW YORK City last month for a vacation. Before we left, I went to my credit union and withdrew money in small denominations. I wanted to make sure I had cash to tip the people who helped us during our trip.
Sometimes, I get confused about who I should tip and how much. It can be a little stressful when you want to make sure you don’t stiff anyone—especially people who are counting on tips to make ends meet, and have thankless and stressful jobs during this pandemic.
We didn’t stay at a luxury hotel, but it was comfortable and rated four stars. I decided I would tip everyone at the hotel who helped us, except the salaried employees. For instance, I didn’t tip the employees dressed in suits behind the counter. I figured if they dressed nicely in their own clothes, they'd probably be salaried.
We arrived early, before our room was ready. We left our bags at the front desk and went out to grab a bite to eat. When we came back, the bellman pulled our bags out of storage and I tipped him $5. I also tipped the housekeeper $10 a day for cleaning our room and the doorman $10 when I asked him to take pictures of us in front of the hotel.
I thought I was doing a pretty good job tipping until we went to this restaurant in a luxury hotel. The restaurant was on the 35th floor, with a beautiful view of Central Park and the Manhattan skyline.
We had reservations, but we wanted a table next to the window so we could take pictures, like tourists do. At our request, the hostess gave us a table with a great view. I left a generous tip with the server because we had a great time and the service was good.
Afterwards, I realized I should have tipped the hostess. I felt terrible and embarrassed about it. My wife said that the hostess and the busboy usually receive a portion of the waiters’ tips. Maybe so. But it didn’t make me feel any better. I felt the hostess deserved more. That’s why I always try to err on the side of generosity. I don’t want to have any regrets.
Sometimes, I get confused about who I should tip and how much. It can be a little stressful when you want to make sure you don’t stiff anyone—especially people who are counting on tips to make ends meet, and have thankless and stressful jobs during this pandemic.
We didn’t stay at a luxury hotel, but it was comfortable and rated four stars. I decided I would tip everyone at the hotel who helped us, except the salaried employees. For instance, I didn’t tip the employees dressed in suits behind the counter. I figured if they dressed nicely in their own clothes, they'd probably be salaried.
We arrived early, before our room was ready. We left our bags at the front desk and went out to grab a bite to eat. When we came back, the bellman pulled our bags out of storage and I tipped him $5. I also tipped the housekeeper $10 a day for cleaning our room and the doorman $10 when I asked him to take pictures of us in front of the hotel.
I thought I was doing a pretty good job tipping until we went to this restaurant in a luxury hotel. The restaurant was on the 35th floor, with a beautiful view of Central Park and the Manhattan skyline.
We had reservations, but we wanted a table next to the window so we could take pictures, like tourists do. At our request, the hostess gave us a table with a great view. I left a generous tip with the server because we had a great time and the service was good.
Afterwards, I realized I should have tipped the hostess. I felt terrible and embarrassed about it. My wife said that the hostess and the busboy usually receive a portion of the waiters’ tips. Maybe so. But it didn’t make me feel any better. I felt the hostess deserved more. That’s why I always try to err on the side of generosity. I don’t want to have any regrets.
The post Travel Tips appeared first on HumbleDollar.
