Jonathan Clements's Blog, page 251
November 19, 2021
The Number
WHEN I WAS IN MY early 30s, I decided to determine ���the number.��� What would be enough money to allow me to retire, and what was the path to get there?
Personal computers were newly available, so I decided to work this out in Lotus 1-2-3. There was no internet to speak of. Investment companies didn���t have online calculators running Monte Carlo simulations that incorporated hundreds of possible retirement outcomes and spat out a most-likely scenario with a 95% confidence level.
Instead, I developed my own rudimentary retirement planner, starting with the premise that my wife and I could live comfortably on $50,000 a year in 1991 dollars. I made several assumptions. Some would, today, make a financial planner cringe:
Inflate my $50,000 target income by 8% annually.
Keep my savings goal separate from any Social Security or pension income, which I���d treat as cushions.
Earn 10% a year on my investments.
Withdraw 8% annually in retirement.
Increase my retirement plan contributions by 5% a year.
I created the spreadsheet and used my investment balance as a base. I plugged in my assumptions and ran it out to age 85. It showed I could achieve my goal, which was to retire in my mid-50s.
Compared to the online calculators available today, it wasn���t very sophisticated. Regardless of how ���the number��� is calculated, however, putting a plan in black and white provided me with some savings discipline. It allowed me to know:
My long-term goal. My original calculation said ���the number��� was just under $1.7 million.
A path to get there. I saw that the steps to reach the goal were readily achievable.
A way to assess my progress annually. In the years when the market dropped, I didn���t hit my target. But I learned that the up years made up for the down years.
There was something about going through this thought process and creating the spreadsheet that solidified my thinking. Each year, I diligently compared my actual investment totals to my target.
As time went by, I updated the spreadsheet with new assumptions. I brought down my withdrawal rate and assumed investment return to more reasonable levels. I increased my savings contributions faster than anticipated. I also extended the planning horizon to age 100. And, yes, when they became available, I used online calculators to validate my plan.
I recently found a 1995 copy of my one-page plan printed by a dot-matrix printer. It said I would meet my goal by 2012���the year I did actually retire.
Personal computers were newly available, so I decided to work this out in Lotus 1-2-3. There was no internet to speak of. Investment companies didn���t have online calculators running Monte Carlo simulations that incorporated hundreds of possible retirement outcomes and spat out a most-likely scenario with a 95% confidence level.
Instead, I developed my own rudimentary retirement planner, starting with the premise that my wife and I could live comfortably on $50,000 a year in 1991 dollars. I made several assumptions. Some would, today, make a financial planner cringe:
Inflate my $50,000 target income by 8% annually.
Keep my savings goal separate from any Social Security or pension income, which I���d treat as cushions.
Earn 10% a year on my investments.
Withdraw 8% annually in retirement.
Increase my retirement plan contributions by 5% a year.
I created the spreadsheet and used my investment balance as a base. I plugged in my assumptions and ran it out to age 85. It showed I could achieve my goal, which was to retire in my mid-50s.
Compared to the online calculators available today, it wasn���t very sophisticated. Regardless of how ���the number��� is calculated, however, putting a plan in black and white provided me with some savings discipline. It allowed me to know:
My long-term goal. My original calculation said ���the number��� was just under $1.7 million.
A path to get there. I saw that the steps to reach the goal were readily achievable.
A way to assess my progress annually. In the years when the market dropped, I didn���t hit my target. But I learned that the up years made up for the down years.
There was something about going through this thought process and creating the spreadsheet that solidified my thinking. Each year, I diligently compared my actual investment totals to my target.
As time went by, I updated the spreadsheet with new assumptions. I brought down my withdrawal rate and assumed investment return to more reasonable levels. I increased my savings contributions faster than anticipated. I also extended the planning horizon to age 100. And, yes, when they became available, I used online calculators to validate my plan.
I recently found a 1995 copy of my one-page plan printed by a dot-matrix printer. It said I would meet my goal by 2012���the year I did actually retire.
The post The Number appeared first on HumbleDollar.
Fees Are Your Foe
THE COSTS WE PAY for active investment management are important���far more important than most investors seem to realize, particularly when the stock market is going up and up.
Start with an interesting reality: Nobody ever actually pays such fees by writing a check. Graciously, money managers take care of that, deducting their fees from the assets they manage for us. Out of sight, out of mind. But wait: Perhaps, instead of being grateful, we should be careful to understand what���s going on.
Money managers and investment advisors will say fees are ���only 1%.��� True, that might seem low if you look at it the conventional way. But isn���t this misleading? Is there a better way?
For example, why are fees based on assets? Years ago, major law firms���which crafted trusts for their clients���also charged by the hour to manage investments, the same way they billed for creating the trusts. But firms that specialized in investing then decided they should charge more for managing larger trusts, and based their fees on a percent of dividends.
Following the Great Crash of 1929, portfolio assets dropped more than dividends were cut. In response to client complaints, leading firms changed their fee formula. They based fees half on dividends and half on assets. That practice was later simplified to basing fees on assets alone. Still, fees were quite low, typically 0.1%.
Without telling clients, managers found a way to do better for themselves. With brokerage commissions fixed at about 40 cents a share, bank trust departments���then the dominant investment managers���made deals with brokers. In exchange for banks paying commissions, brokers deposited large sums of customer money at the banks. Banks, in turn, could lend out that money to corporate and other borrowers. The interest income on these loans was credited to the trust departments.
This quiet arrangement worked well until brokerage commissions were made negotiable in 1975. To keep the trust business profitable, something had to change. That���s when the nation���s leading trust company, Morgan Guaranty Trust, increased its management fees to 0.25%. Contrary to the expectation that it would lose many accounts, it lost just one.
The investment management industry realized that fees didn't matter to clients.
Of course, this was nearly half a century ago. Back then, most clients believed the ���better��� managers would ���beat the market,��� so wise investors would pay up to get better results. The comprehensive data on returns that we now have wasn���t then available, so this belief wasn���t challenged by��evidence.
The idea that higher prices are indicative of ���better��� value was documented by sociologist Thorstein Veblen. He found that high prices for luxury goods could actually increase sales, contrary to the law of supply and demand. This ���Veblen effect��� can still be seen in luxury markets, such as those for fine wines, high-end watches, and top-of-the-line dresses, suits, handbags and shoes.
But do investors actually get greater value���meaning higher returns���when they pay higher fees? The objective data is clear: no.
SPIVA data on stock mutual funds is particularly damning: 86% of U.S. actively managed stock mutual funds failed to keep up with the broad market over the 10 years through June 30. On top of that, those that fell short failed by a far larger margin than the benefit that accrued to those lucky few who beat the broad market.
While there may be a few funds that outpace their benchmark, any statistician who studies the data would throw cold water on the hopes of finding a winner going forward. The odds are high that, among the 14% that did better over the past 10 years, the vast majority will do worse over the next 10 years���and there���s no known way to identify which funds will be the exception.
Investors shouldn���t let their judgment be swayed by the Veblen effect, and instead should take another look at the question of fees, especially when they���re couched as "only 1%." They may be surprised at how high active management fees really are���when framed in other ways:
Suppose we frame fees on expected returns instead of assets. If long-term returns average 7%, then fees posted as ���only 1%��� are actually consuming 14% of expected returns. This vaporizes the word ���only.���
All active managers must purport to be ���different��� than the overall market in some way. Adjusting fees to reflect this greater risk would lift fees at least a bit higher.
While rarely discussed, taxes on actively managed funds are much higher than on index funds. Active managers trade much more frequently than index managers, and so realize taxable gains for shareholders.
Another cost of using active managers is actually imposed by investors on themselves, but it���s nonetheless real. That���s the cost clients create by changing active managers at the wrong time or by going to cash when the market declines.
Finally, another ���cost��� is the worrying that clients do. They fret that they���ve chosen the wrong manager, and wonder what they should do about it and when.
These subtle costs add up. Investors���not you, not me, but the guy behind that tree���might lose 20% to 30% of what they could have earned in any given year. Compounded over the long term, these costs add up and up.
Fortunately, today���s investors have an alternative: low-cost indexing. This matter of fees is not ���just an academic question.��� The effect of high fees on investments can be objectively measured���and, thank goodness, overcome.
Latest Posts
HERE ARE THE SIX other articles published by HumbleDollar this week:
"I wasn���t in a strong enough position to invest in a failure���and we suffered two," writes Richard Hayman. "I went from feeling good about not running out of money to being extremely worried."
Don't chase performance. Beware company stock. Favor target funds. Avoid naive diversification. Consider index funds. Resist home bias. John Lim offers six principles for 401(k) investors.
"When it comes time for me to kick the bucket, I want to make sure it���s a big bucket I���m kicking," writes Jim Kerr. "And that it has plenty of dents from all the places we've gone together."
Transparency. Predictability. Equity. Adam Grossman discusses three principles that should guide parents' financial gifts to their adult children.
"Representing Social Security as theft, a rip-off or a Ponzi scheme is reprehensible," argues Dick Quinn. "That���s like saying term��insurance is a rip-off if you don���t die within the insured period."
Want to change careers��or lead an entirely different sort of life? Take a cue from millennials, advises Jim Wasserman, and don't let yourself be held back by traditional measures of success.
Also be sure to check out the past week's��blog posts, including Mike Flack on Medigap policies,��Jiab Wasserman on elder abuse, Dick Quinn on IRMAA,��Kyle McIntosh on hybrid cars��and Howard Rohleder on his retirement��number.
Charles D. Ellis is the author of 18 books, including Winning the Loser���s Game,��which is now in its 8th edition, with 600,000 copies sold. Charley has taught investing courses at both Yale and Harvard business schools, and he served for 17 years on Yale���s investment committee. Check out his earlier articles.
Start with an interesting reality: Nobody ever actually pays such fees by writing a check. Graciously, money managers take care of that, deducting their fees from the assets they manage for us. Out of sight, out of mind. But wait: Perhaps, instead of being grateful, we should be careful to understand what���s going on.
Money managers and investment advisors will say fees are ���only 1%.��� True, that might seem low if you look at it the conventional way. But isn���t this misleading? Is there a better way?
For example, why are fees based on assets? Years ago, major law firms���which crafted trusts for their clients���also charged by the hour to manage investments, the same way they billed for creating the trusts. But firms that specialized in investing then decided they should charge more for managing larger trusts, and based their fees on a percent of dividends.
Following the Great Crash of 1929, portfolio assets dropped more than dividends were cut. In response to client complaints, leading firms changed their fee formula. They based fees half on dividends and half on assets. That practice was later simplified to basing fees on assets alone. Still, fees were quite low, typically 0.1%.
Without telling clients, managers found a way to do better for themselves. With brokerage commissions fixed at about 40 cents a share, bank trust departments���then the dominant investment managers���made deals with brokers. In exchange for banks paying commissions, brokers deposited large sums of customer money at the banks. Banks, in turn, could lend out that money to corporate and other borrowers. The interest income on these loans was credited to the trust departments.
This quiet arrangement worked well until brokerage commissions were made negotiable in 1975. To keep the trust business profitable, something had to change. That���s when the nation���s leading trust company, Morgan Guaranty Trust, increased its management fees to 0.25%. Contrary to the expectation that it would lose many accounts, it lost just one.
The investment management industry realized that fees didn't matter to clients.
Of course, this was nearly half a century ago. Back then, most clients believed the ���better��� managers would ���beat the market,��� so wise investors would pay up to get better results. The comprehensive data on returns that we now have wasn���t then available, so this belief wasn���t challenged by��evidence.
The idea that higher prices are indicative of ���better��� value was documented by sociologist Thorstein Veblen. He found that high prices for luxury goods could actually increase sales, contrary to the law of supply and demand. This ���Veblen effect��� can still be seen in luxury markets, such as those for fine wines, high-end watches, and top-of-the-line dresses, suits, handbags and shoes.
But do investors actually get greater value���meaning higher returns���when they pay higher fees? The objective data is clear: no.
SPIVA data on stock mutual funds is particularly damning: 86% of U.S. actively managed stock mutual funds failed to keep up with the broad market over the 10 years through June 30. On top of that, those that fell short failed by a far larger margin than the benefit that accrued to those lucky few who beat the broad market.
While there may be a few funds that outpace their benchmark, any statistician who studies the data would throw cold water on the hopes of finding a winner going forward. The odds are high that, among the 14% that did better over the past 10 years, the vast majority will do worse over the next 10 years���and there���s no known way to identify which funds will be the exception.
Investors shouldn���t let their judgment be swayed by the Veblen effect, and instead should take another look at the question of fees, especially when they���re couched as "only 1%." They may be surprised at how high active management fees really are���when framed in other ways:
Suppose we frame fees on expected returns instead of assets. If long-term returns average 7%, then fees posted as ���only 1%��� are actually consuming 14% of expected returns. This vaporizes the word ���only.���
All active managers must purport to be ���different��� than the overall market in some way. Adjusting fees to reflect this greater risk would lift fees at least a bit higher.
While rarely discussed, taxes on actively managed funds are much higher than on index funds. Active managers trade much more frequently than index managers, and so realize taxable gains for shareholders.
Another cost of using active managers is actually imposed by investors on themselves, but it���s nonetheless real. That���s the cost clients create by changing active managers at the wrong time or by going to cash when the market declines.
Finally, another ���cost��� is the worrying that clients do. They fret that they���ve chosen the wrong manager, and wonder what they should do about it and when.
These subtle costs add up. Investors���not you, not me, but the guy behind that tree���might lose 20% to 30% of what they could have earned in any given year. Compounded over the long term, these costs add up and up.
Fortunately, today���s investors have an alternative: low-cost indexing. This matter of fees is not ���just an academic question.��� The effect of high fees on investments can be objectively measured���and, thank goodness, overcome.
Latest Posts
HERE ARE THE SIX other articles published by HumbleDollar this week:
"I wasn���t in a strong enough position to invest in a failure���and we suffered two," writes Richard Hayman. "I went from feeling good about not running out of money to being extremely worried."
Don't chase performance. Beware company stock. Favor target funds. Avoid naive diversification. Consider index funds. Resist home bias. John Lim offers six principles for 401(k) investors.
"When it comes time for me to kick the bucket, I want to make sure it���s a big bucket I���m kicking," writes Jim Kerr. "And that it has plenty of dents from all the places we've gone together."
Transparency. Predictability. Equity. Adam Grossman discusses three principles that should guide parents' financial gifts to their adult children.
"Representing Social Security as theft, a rip-off or a Ponzi scheme is reprehensible," argues Dick Quinn. "That���s like saying term��insurance is a rip-off if you don���t die within the insured period."
Want to change careers��or lead an entirely different sort of life? Take a cue from millennials, advises Jim Wasserman, and don't let yourself be held back by traditional measures of success.
Also be sure to check out the past week's��blog posts, including Mike Flack on Medigap policies,��Jiab Wasserman on elder abuse, Dick Quinn on IRMAA,��Kyle McIntosh on hybrid cars��and Howard Rohleder on his retirement��number.
Charles D. Ellis is the author of 18 books, including Winning the Loser���s Game,��which is now in its 8th edition, with 600,000 copies sold. Charley has taught investing courses at both Yale and Harvard business schools, and he served for 17 years on Yale���s investment committee. Check out his earlier articles.The post Fees Are Your Foe appeared first on HumbleDollar.
Bye-Bye I-Buy
ZILLOW ANNOUNCED recently that it would��cease its algorithm-driven home buying program. Thus ends its three-year experiment to disrupt the real-estate brokerage business with what���s known as ���i-buying.���
Zillow had purchased homes without significant involvement by real-estate agents. Instead, it used its proprietary algorithm���which it calls the Zestimate���to determine a property���s value. It then offered homeowners a percentage of this value, in cash, to buy their houses.
This offer proved appealing to many home sellers. They didn���t have to stage their homes and could be certain of the price they���d get. It also gave them a definitive closing date.
To generate a profit on each home sale, Zillow would keep the commissions usually paid to the seller���s and buyer���s brokers. They would also update the properties cosmetically, when needed.
Ultimately, Zillow erred grossly in anticipating how difficult it would be to turn a profit in the residential real-estate market. There were several problems with its model. Zillow likely discovered what the rest of us already knew���that getting a contractor to show up on time and do a good job is incredibly difficult, and that it���s hard to know whether a house is good value unless you take the time to carefully inspect the property. Of the 1,000 homes Zillow recently listed for sale in its five biggest markets, 64% were being offered for less than the company paid for them.
I wouldn���t fault any company for realizing the error of its ways and pivoting accordingly. What Zillow did, however, was irksome. How so? It announced it was pausing its i-buying program on Oct. 18. But it turned out to be more than a pause. Just��two weeks later, on Nov. 2, Zillow admitted defeat and shut down its home buying program, shedding roughly 25% of its workforce in the process.
Zillow stock actually rose after it paused i-buying. But it took a 40% haircut when management surprised investors by terminating the program. Its stock is now down more than 70% from its February high.
Investors have to wonder��whether management���s sudden decision was a knee-jerk reaction to its home-selling losses. Or did management know, when it announced the pause in i-buying, that it would kill off the program two weeks later? In other words, is Zillow���s management given to rash decisions���or does it lack integrity?
To be clear, the real-estate business model is anachronistic and, indeed, not every i-buying��company is failing. A commission of, say, 6% means that real-estate agents who broker the sale of a $250,000 house earn $15,000. It takes roughly the same amount of work to sell a $1 million home, and yet their take would be four times greater. Make no mistake: This industry is ripe for disruption���but not, it seems, by Zillow.
Zillow had purchased homes without significant involvement by real-estate agents. Instead, it used its proprietary algorithm���which it calls the Zestimate���to determine a property���s value. It then offered homeowners a percentage of this value, in cash, to buy their houses.
This offer proved appealing to many home sellers. They didn���t have to stage their homes and could be certain of the price they���d get. It also gave them a definitive closing date.
To generate a profit on each home sale, Zillow would keep the commissions usually paid to the seller���s and buyer���s brokers. They would also update the properties cosmetically, when needed.
Ultimately, Zillow erred grossly in anticipating how difficult it would be to turn a profit in the residential real-estate market. There were several problems with its model. Zillow likely discovered what the rest of us already knew���that getting a contractor to show up on time and do a good job is incredibly difficult, and that it���s hard to know whether a house is good value unless you take the time to carefully inspect the property. Of the 1,000 homes Zillow recently listed for sale in its five biggest markets, 64% were being offered for less than the company paid for them.
I wouldn���t fault any company for realizing the error of its ways and pivoting accordingly. What Zillow did, however, was irksome. How so? It announced it was pausing its i-buying program on Oct. 18. But it turned out to be more than a pause. Just��two weeks later, on Nov. 2, Zillow admitted defeat and shut down its home buying program, shedding roughly 25% of its workforce in the process.
Zillow stock actually rose after it paused i-buying. But it took a 40% haircut when management surprised investors by terminating the program. Its stock is now down more than 70% from its February high.
Investors have to wonder��whether management���s sudden decision was a knee-jerk reaction to its home-selling losses. Or did management know, when it announced the pause in i-buying, that it would kill off the program two weeks later? In other words, is Zillow���s management given to rash decisions���or does it lack integrity?
To be clear, the real-estate business model is anachronistic and, indeed, not every i-buying��company is failing. A commission of, say, 6% means that real-estate agents who broker the sale of a $250,000 house earn $15,000. It takes roughly the same amount of work to sell a $1 million home, and yet their take would be four times greater. Make no mistake: This industry is ripe for disruption���but not, it seems, by Zillow.
The post Bye-Bye I-Buy appeared first on HumbleDollar.
Investing in Family
AS A MEMBER of the lucky sperm club, I reluctantly joined my father in business in 1970. I know it was his dream, but it wasn���t mine. He started his cash register business in 1938 and, by the time I signed on, the industry was still steep in mechanical devices. Not my passion. I liked electronics.
Still, I agreed to do things his way and learn the business from the ground up. He said the first thing I had to do was learn to sell. Once I did that, he said, I could do anything I wanted in business. I sold cash registers for 12 years, and then my brother and I bought my father���s company.
It was the only way to get him to finally retire and really enjoy himself. My brother and I had a genuinely good relationship and we worked well together. We were ready to risk taking over the business.
To fund my father���s retirement, our accountant had to figure out the best way to supply him with income at a level we could afford and that he would agree to. To make it work, we also bought his building. My dad was extremely optimistic���he gave us a 30-year mortgage. At the time, he was age 68.
Looking back at the deal we made, it didn���t seem especially ���rich.��� But in today���s dollars, we paid him about $15,000 a month. Half of that was taxed at capital gains rates.
After my brother and I sold the business in 1999, we went our separate ways. He was much younger and wanted to work. I was ready to retire, or so I thought. But being only 54 and not willing to play golf daily, I went back to work for a few more years. In any case, I really didn���t have enough money to retire since I could potentially be retired for many more years than I���d worked.
In the meantime, my daughter and her family were moving back to the East Coast from California, and wanted to start a business. I didn���t think it was a great move, as my son-in-law was very inexperienced. Also, they had no money.
My thought was to help my kids, and make an investment in someone I trusted. The risks were huge, though I didn���t think I could lose it all. With any luck, my son-in-law might listen to me from time to time, and accept my help.
Fortunately, he was far smarter than I gave him credit for, plus my daughter was exceptionally good at marketing. After three years, my monthly income from their business grew to a meaningful amount.
But I had other children and stepchildren who also had dreams of starting their own businesses. What I learned: I didn���t get the opportunity to refuse to invest. Once you bankroll one child���s business venture, you must do it for the others.
I wasn���t in a strong enough financial position to invest in a failure���and we suffered two of them. One was big and the other was relatively small. I went from feeling good about not running out of money to being extremely worried.
This story has a successful conclusion money-wise, but not life-wise. My son-in-law sold his business, and my share of the proceeds gave us enough to make it through to the end.
Unfortunately, last year, my wife fainted, fell and suffered a traumatic brain injury. While her recovery can be called miraculous, she has some significant residual handicaps. All I can say is, we���ve been extremely lucky with her recovery, and our long-term-care insurance allows her to have the care she needs throughout the day.
We learned once again that life is full of surprises. Long ago, we decided we wanted to age-in-place. We made modifications to our home to accommodate hospital beds and caretakers���but we never expected to need them while still in our 70s.
Richard Hayman is a second-generation family business owner and inventor with three patents. He studied engineering at Cornell University and received a master's degree from George Washington University. After his family's business was purchased by a public company in 1999, Richard went on to enjoy several additional careers. He���s also been a STEM instructor for middle and high school students in after-school technology programs.
Still, I agreed to do things his way and learn the business from the ground up. He said the first thing I had to do was learn to sell. Once I did that, he said, I could do anything I wanted in business. I sold cash registers for 12 years, and then my brother and I bought my father���s company.
It was the only way to get him to finally retire and really enjoy himself. My brother and I had a genuinely good relationship and we worked well together. We were ready to risk taking over the business.
To fund my father���s retirement, our accountant had to figure out the best way to supply him with income at a level we could afford and that he would agree to. To make it work, we also bought his building. My dad was extremely optimistic���he gave us a 30-year mortgage. At the time, he was age 68.
Looking back at the deal we made, it didn���t seem especially ���rich.��� But in today���s dollars, we paid him about $15,000 a month. Half of that was taxed at capital gains rates.
After my brother and I sold the business in 1999, we went our separate ways. He was much younger and wanted to work. I was ready to retire, or so I thought. But being only 54 and not willing to play golf daily, I went back to work for a few more years. In any case, I really didn���t have enough money to retire since I could potentially be retired for many more years than I���d worked.
In the meantime, my daughter and her family were moving back to the East Coast from California, and wanted to start a business. I didn���t think it was a great move, as my son-in-law was very inexperienced. Also, they had no money.
My thought was to help my kids, and make an investment in someone I trusted. The risks were huge, though I didn���t think I could lose it all. With any luck, my son-in-law might listen to me from time to time, and accept my help.
Fortunately, he was far smarter than I gave him credit for, plus my daughter was exceptionally good at marketing. After three years, my monthly income from their business grew to a meaningful amount.
But I had other children and stepchildren who also had dreams of starting their own businesses. What I learned: I didn���t get the opportunity to refuse to invest. Once you bankroll one child���s business venture, you must do it for the others.
I wasn���t in a strong enough financial position to invest in a failure���and we suffered two of them. One was big and the other was relatively small. I went from feeling good about not running out of money to being extremely worried.
This story has a successful conclusion money-wise, but not life-wise. My son-in-law sold his business, and my share of the proceeds gave us enough to make it through to the end.
Unfortunately, last year, my wife fainted, fell and suffered a traumatic brain injury. While her recovery can be called miraculous, she has some significant residual handicaps. All I can say is, we���ve been extremely lucky with her recovery, and our long-term-care insurance allows her to have the care she needs throughout the day.
We learned once again that life is full of surprises. Long ago, we decided we wanted to age-in-place. We made modifications to our home to accommodate hospital beds and caretakers���but we never expected to need them while still in our 70s.
Richard Hayman is a second-generation family business owner and inventor with three patents. He studied engineering at Cornell University and received a master's degree from George Washington University. After his family's business was purchased by a public company in 1999, Richard went on to enjoy several additional careers. He���s also been a STEM instructor for middle and high school students in after-school technology programs.The post Investing in Family appeared first on HumbleDollar.
November 18, 2021
Clicking for Cash
A FEW YEARS AGO, I searched a government database of unclaimed assets���and was surprised to discover the state of Oregon owed me money. I submitted a claim and waited a few weeks.
A check for $86 arrived. The funds were from royalties I���d earned from a YouTube channel that I���d long since forgotten about.
It���s estimated that one out of 10 Americans has unclaimed��property waiting for them. A variety of websites allow anyone to search databases filled with unclaimed property, uncashed checks, forgotten bank accounts, returned security deposits, tax refunds and long-forgotten savings bonds.
Intrigued by the idea of searching for found money? Here are some tips:
If you���ve had multiple legal names, search under all of them. It may be useful to look for common misspellings of your first and last name. Also, search under any nicknames you may have used.
If you���ve ever operated a business, you can search for unclaimed assets owed to the business. You might also check under the names of elderly relatives, including your parents.
If you���ve lived in different states, check the unclaimed property websites for each one. The National Association of Unclaimed Property Administrators maintains a website��that provides access to every state���s unclaimed property portal.
The Bureau of the Fiscal Service has its own website with information about searching for unclaimed funds held by federal agencies. The U.S. Treasury recently created a site��where you can search for savings bonds that are no longer earning interest but that haven���t yet been redeemed.
Unclaimed property isn���t limited to money. Some states, including Oregon, will attempt to return military medals and insignia to their rightful owners. Other states want to return the contents of forgotten safe-deposit boxes.
A check for $86 arrived. The funds were from royalties I���d earned from a YouTube channel that I���d long since forgotten about.
It���s estimated that one out of 10 Americans has unclaimed��property waiting for them. A variety of websites allow anyone to search databases filled with unclaimed property, uncashed checks, forgotten bank accounts, returned security deposits, tax refunds and long-forgotten savings bonds.
Intrigued by the idea of searching for found money? Here are some tips:
If you���ve had multiple legal names, search under all of them. It may be useful to look for common misspellings of your first and last name. Also, search under any nicknames you may have used.
If you���ve ever operated a business, you can search for unclaimed assets owed to the business. You might also check under the names of elderly relatives, including your parents.
If you���ve lived in different states, check the unclaimed property websites for each one. The National Association of Unclaimed Property Administrators maintains a website��that provides access to every state���s unclaimed property portal.
The Bureau of the Fiscal Service has its own website with information about searching for unclaimed funds held by federal agencies. The U.S. Treasury recently created a site��where you can search for savings bonds that are no longer earning interest but that haven���t yet been redeemed.
Unclaimed property isn���t limited to money. Some states, including Oregon, will attempt to return military medals and insignia to their rightful owners. Other states want to return the contents of forgotten safe-deposit boxes.
The post Clicking for Cash appeared first on HumbleDollar.
Strikes Me as Fair
THE FEDERAL government���s Centers for Medicare and Medicaid Services just announced the new income-based Part B and Part D premiums for 2022. Many people aren���t happy.
Next year���s basic Part B premium jumps to $170.10 a month, in part because Congress artificially limited this year���s premium increase to only 25% of the true amount. It���s time to play catchup���and deal with rising health care costs.
But a small group of seniors will pay more than $170.10 a month���sometimes much more. At issue is IRMAA, short for income-related monthly adjustment amount, the Medicare premium surcharges for higher-income retirees. In 2022, these surcharges start at a modified adjusted gross income of $91,000 for single individuals and $182,000 for couples.
Like most people, I don���t like paying more than I have to for anything. But let���s be realistic: The median��household��income for Americans ages 65 to 74 is $46,360 and, for those over age 74, it���s $54,058. For a couple to pay IRMAA premiums in 2022, they need an income that���s more than three times these medians.
I, too, would like to be paying only the standard Medicare Part B premium. But what I like more���and truly appreciate���is being in such an enviable position that I have to pay a lot more for Medicare than the vast majority of my fellow seniors.
If you���re one of those Americans who supports the fair share rhetoric directed at the super-wealthy, keep in mind this principle should apply to everyone. Most out-of-pocket health care costs, and even most health care insurance premiums, are highly regressive. They don���t care how much you earn. A young family with modest income can have a $5,000 deductible and pay $500 a month in premiums, just like the wealthy family two towns over. Seniors have good health care coverage and, overall, relatively modest costs. Why not make Medicare premiums a bit progressive?
Call me naive, but I don���t think it���s right for well-off older Americans to employ financial strategies that avoid or minimize IRMAA premium surcharges���things like doing Roth conversions in their 50s and early 60s, so their modified adjusted gross income later looks modest for IRMAA purposes.
Among some Facebook groups I follow, people are obsessed with IRMAA and view it as unfair���something to avoid as a part of retirement planning. My contention: We may not like those extra Medicare premiums taking a chunk out of our Social Security check���but they strike me as fair.
The post Strikes Me as Fair appeared first on HumbleDollar.
Paths to Success
MY FRIEND HAFIZ has a common midlife problem. He���s built a successful career over 20 years. But now he wants a change���a new direction to focus his energy and talents. Over coffee, we kicked around the different paths he might take.
Some were offshoots of his current job, such as becoming an industry consultant. Others were wholly new, like becoming a writer.
���The problem,��� Hafiz sighed, ���is that whatever I do, it���s gotta pay for the country club.���
Hafiz explained that, while his wife was the primary earner, his salary was dedicated to certain lifestyle luxuries, most notably the dues at their country club.
Now, I���m not against someone enjoying country club life. We belonged to one ourselves for a while. What struck me, however, was Hafiz didn���t seem to be enjoying his membership so much as feeling trapped by it. It was an anchor limiting his movement along alternative paths to happiness.
It reminded me of a Vox piece I recently read about what they call the near-rich. We often focus on the top 1% of Americans, with their yachts and jets. They control as much wealth as the bottom 90% of the population, according to the article.
The near-rich, like my friend, are those in-between. While comprised of 9.9% of the population, often they���re the drivers of the social standards of American society.
Through hard work and good education, many of them have successfully worked their way up to achieve an enviable lifestyle. Others have capitalized on the head start they were born with. They have played the game well, done it ���right,��� and now reap the rewards and symbols of success.
According to the Vox article, however, there can be a problem lurking under this success. For the near-rich���and I include my own family in this group���the road to success is so well-worn that it can cut off the imagination. It limits our ability to consider other paths, or even other measures, of success.
In my friend Hafiz���s case, he has certainly earned all the rewards from building a successful career. But now, these rewards���or a fear of losing them���hold him back. He can���t imagine a successful life without a country club membership.
Fortunately, I see a change in attitude among millennials. As a retired teacher, I���m in contact with many of my former students. They���re still early in their careers, but seem less concerned with the traditional measures of accomplishment.
They���re willing to work fewer hours and are less interested in rising up through the corporate ranks. In exchange, they have fewer possessions to worry about and more time for family and friends. They shun homeownership for the flexibility of renting.
We oldsters may cluck our tongues and call them lazy for not striving for the things we think mark success. But perhaps they���ve seen the pitfalls of those traditional trophies, such as housing busts. They���ve become more creative and thoughtful in figuring out what they want.
Some people even complain millennials are ���killing" industries. But isn���t it their right to redefine consumerism on their own terms? The bottom line: Millennials are content.
My wife and I both went directly from college to grad school and then on to a profession. We were taken aback when one of our sons, whose goal is to become an actuary, said he wanted to take two years after college to teach in Japan.
Would it put him behind on the career path? What about the schedule of actuarial exams he had to take? What if he didn���t come back?
He went, paying his own way. And, after two years, he returned. He���s just taken his fourth-level actuarial exam, and has a good job with State Farm. Even more, he has a world of extra cultural exposure. I realize now that, even if he had decided not to be an actuary, that would have been okay, too.
Our other son had a high-paying software developer job in Madison, Wisconsin. He walked away to take a similar job with a smaller company in Austin, Texas. Austin is closer to his family and friends. Also, he���s a runner, and Austin has more tolerable running weather.
When we are young, we���re told to imagine all the possible places we could go. We can���t let the success of one path, even a well-worn road, let us lose sight of the road less travelled.
Jim Wasserman is a former business litigation attorney who taught economics and humanities for 20 years. He's the author of a three-book series on how to teach elementary, middle and high school students about behavioral economics and media literacy. He has authored several educational children's books. Jim���s newest book is Enough Stuff, a story about appreciating family and friends���rather than gifts���during the holidays. Jim lives in Texas with his wife and fellow HumbleDollar contributor, Jiab. Together, they're currently working on a book, ���Your Third Life: Reflections on Finding Our Way by Taking the Long Route.��� Check out Jim's earlier��articles.
Some were offshoots of his current job, such as becoming an industry consultant. Others were wholly new, like becoming a writer.
���The problem,��� Hafiz sighed, ���is that whatever I do, it���s gotta pay for the country club.���
Hafiz explained that, while his wife was the primary earner, his salary was dedicated to certain lifestyle luxuries, most notably the dues at their country club.
Now, I���m not against someone enjoying country club life. We belonged to one ourselves for a while. What struck me, however, was Hafiz didn���t seem to be enjoying his membership so much as feeling trapped by it. It was an anchor limiting his movement along alternative paths to happiness.
It reminded me of a Vox piece I recently read about what they call the near-rich. We often focus on the top 1% of Americans, with their yachts and jets. They control as much wealth as the bottom 90% of the population, according to the article.
The near-rich, like my friend, are those in-between. While comprised of 9.9% of the population, often they���re the drivers of the social standards of American society.
Through hard work and good education, many of them have successfully worked their way up to achieve an enviable lifestyle. Others have capitalized on the head start they were born with. They have played the game well, done it ���right,��� and now reap the rewards and symbols of success.
According to the Vox article, however, there can be a problem lurking under this success. For the near-rich���and I include my own family in this group���the road to success is so well-worn that it can cut off the imagination. It limits our ability to consider other paths, or even other measures, of success.
In my friend Hafiz���s case, he has certainly earned all the rewards from building a successful career. But now, these rewards���or a fear of losing them���hold him back. He can���t imagine a successful life without a country club membership.
Fortunately, I see a change in attitude among millennials. As a retired teacher, I���m in contact with many of my former students. They���re still early in their careers, but seem less concerned with the traditional measures of accomplishment.
They���re willing to work fewer hours and are less interested in rising up through the corporate ranks. In exchange, they have fewer possessions to worry about and more time for family and friends. They shun homeownership for the flexibility of renting.
We oldsters may cluck our tongues and call them lazy for not striving for the things we think mark success. But perhaps they���ve seen the pitfalls of those traditional trophies, such as housing busts. They���ve become more creative and thoughtful in figuring out what they want.
Some people even complain millennials are ���killing" industries. But isn���t it their right to redefine consumerism on their own terms? The bottom line: Millennials are content.
My wife and I both went directly from college to grad school and then on to a profession. We were taken aback when one of our sons, whose goal is to become an actuary, said he wanted to take two years after college to teach in Japan.
Would it put him behind on the career path? What about the schedule of actuarial exams he had to take? What if he didn���t come back?
He went, paying his own way. And, after two years, he returned. He���s just taken his fourth-level actuarial exam, and has a good job with State Farm. Even more, he has a world of extra cultural exposure. I realize now that, even if he had decided not to be an actuary, that would have been okay, too.
Our other son had a high-paying software developer job in Madison, Wisconsin. He walked away to take a similar job with a smaller company in Austin, Texas. Austin is closer to his family and friends. Also, he���s a runner, and Austin has more tolerable running weather.
When we are young, we���re told to imagine all the possible places we could go. We can���t let the success of one path, even a well-worn road, let us lose sight of the road less travelled.
Jim Wasserman is a former business litigation attorney who taught economics and humanities for 20 years. He's the author of a three-book series on how to teach elementary, middle and high school students about behavioral economics and media literacy. He has authored several educational children's books. Jim���s newest book is Enough Stuff, a story about appreciating family and friends���rather than gifts���during the holidays. Jim lives in Texas with his wife and fellow HumbleDollar contributor, Jiab. Together, they're currently working on a book, ���Your Third Life: Reflections on Finding Our Way by Taking the Long Route.��� Check out Jim's earlier��articles.The post Paths to Success appeared first on HumbleDollar.
November 17, 2021
Thy Will Be Done
SOMEONE I KNOW recently learned she has a rare cancer that���s already at stage four. She���s getting treated for the cancer, as well as for various complications.��I���m not surprised she���s battling the disease. She���s strong, independent and driven.
What is surprising? She���s never written a will, and must now deal with that along with a serious medical issue. Moreover, among her three adult children, one still lives at home���and has a child of her own. Both mother and child are entirely dependent on Grandma for financial support.
Why don���t people get wills drawn up? It may be the complexity. Who should get the house? Who should get the car���or should it be sold and cash distributed? Who should get Grandpa���s watch? Would a trust be better? It can seem like a lot of decisions, especially if you���re dealing with a life-threatening illness.
My advice: Don���t let yourself end up in this situation���and don���t let the perfect be the enemy of the good. Pull up a free or low-cost template for your state from the many available on the internet and fill in the blanks. If it helps, assume you only have an hour left in the world to do it. Keep it simple. Consider letting your heirs figure out how to handle the house, the car and various possessions. The most important thing is to make clear that these assets should pass to them. Head down to your local notary, grab a couple of witnesses who aren���t named in the will, and you���ll be done.
Naming someone to take care of minor children or pets is more involved, as you���d want to discuss this with whoever you���re naming. In some states, designated guardians may also need to sign, showing that they���ve accepted their role.
Wait, don���t you need a lawyer? Maybe, maybe not. In any case, do a will yourself first. It will help you start thinking about what you want. And if you should die before you get around to consulting an attorney, you won���t die intestate���meaning, without a will.
Having a will is crucial to reduce legal wrangling and family fights after your death, including battles over who should take care of any children still considered minors. As for Grandpa���s watch and other possessions, create a document separate from the will that lists your desires. This isn���t legally binding, but it can help your heirs and executor know what your preferences would have been. Such a list is also easier to add to or change than the will itself.
What is surprising? She���s never written a will, and must now deal with that along with a serious medical issue. Moreover, among her three adult children, one still lives at home���and has a child of her own. Both mother and child are entirely dependent on Grandma for financial support.
Why don���t people get wills drawn up? It may be the complexity. Who should get the house? Who should get the car���or should it be sold and cash distributed? Who should get Grandpa���s watch? Would a trust be better? It can seem like a lot of decisions, especially if you���re dealing with a life-threatening illness.
My advice: Don���t let yourself end up in this situation���and don���t let the perfect be the enemy of the good. Pull up a free or low-cost template for your state from the many available on the internet and fill in the blanks. If it helps, assume you only have an hour left in the world to do it. Keep it simple. Consider letting your heirs figure out how to handle the house, the car and various possessions. The most important thing is to make clear that these assets should pass to them. Head down to your local notary, grab a couple of witnesses who aren���t named in the will, and you���ll be done.
Naming someone to take care of minor children or pets is more involved, as you���d want to discuss this with whoever you���re naming. In some states, designated guardians may also need to sign, showing that they���ve accepted their role.
Wait, don���t you need a lawyer? Maybe, maybe not. In any case, do a will yourself first. It will help you start thinking about what you want. And if you should die before you get around to consulting an attorney, you won���t die intestate���meaning, without a will.
Having a will is crucial to reduce legal wrangling and family fights after your death, including battles over who should take care of any children still considered minors. As for Grandpa���s watch and other possessions, create a document separate from the will that lists your desires. This isn���t legally binding, but it can help your heirs and executor know what your preferences would have been. Such a list is also easier to add to or change than the will itself.
The post Thy Will Be Done appeared first on HumbleDollar.
Dabbling in Digital
IF YOU���RE LIKE ME, you want to stick with your long-term investment plan, while remaining open to new ideas. It���s a balancing act���to avoid missing a new, long-lasting trend, while not getting caught up in a bubble.
That���s how I feel about cryptocurrencies. Their market cap has swelled to $2.6 trillion. But what does that mean? Contrast that to the value of the global stock and bond markets: Each is about $125 trillion.
To me, it makes sense to have some exposure to bitcoin, ethereum and the like. A portfolio weighting in proportion to the global investable market of cryptocurrencies amounts to about 1% of assets.
That���s probably not a huge dollar amount for most investors. But I���d argue that anything much above 1% risks becoming an outsized, speculative bet. At the same time, having zero exposure could be seen as being underweight.
Buying crypto directly is expensive. Coinbase has transaction fees of roughly 1.5%. The new ProShares Bitcoin Strategy ETF (symbol: BITO) sports a lofty 0.95% expense ratio, along with other risks. But you don���t have to open a Coinbase account to get digital exposure, nor must you purchase a bitcoin exchange-traded fund. There���s another option.
I was intrigued by a list of companies with digital asset exposure put together by Bank of America Global Research. The list of 43 stocks includes many companies we know well. All of them either own cryptocurrencies outright, or have invested in digital assets and the blockchain.
As I see it, owning a basket of crypto-exposed stocks could be a cheaper option than buying cryptocurrencies directly. The downside: It adds more complexity to my portfolio���and it���s yet another investment group I���d have to track.
That���s how I feel about cryptocurrencies. Their market cap has swelled to $2.6 trillion. But what does that mean? Contrast that to the value of the global stock and bond markets: Each is about $125 trillion.
To me, it makes sense to have some exposure to bitcoin, ethereum and the like. A portfolio weighting in proportion to the global investable market of cryptocurrencies amounts to about 1% of assets.
That���s probably not a huge dollar amount for most investors. But I���d argue that anything much above 1% risks becoming an outsized, speculative bet. At the same time, having zero exposure could be seen as being underweight.
Buying crypto directly is expensive. Coinbase has transaction fees of roughly 1.5%. The new ProShares Bitcoin Strategy ETF (symbol: BITO) sports a lofty 0.95% expense ratio, along with other risks. But you don���t have to open a Coinbase account to get digital exposure, nor must you purchase a bitcoin exchange-traded fund. There���s another option.
I was intrigued by a list of companies with digital asset exposure put together by Bank of America Global Research. The list of 43 stocks includes many companies we know well. All of them either own cryptocurrencies outright, or have invested in digital assets and the blockchain.
As I see it, owning a basket of crypto-exposed stocks could be a cheaper option than buying cryptocurrencies directly. The downside: It adds more complexity to my portfolio���and it���s yet another investment group I���d have to track.
The post Dabbling in Digital appeared first on HumbleDollar.
Hybrid Math
MY FAMILY WILL SOON be in the market for a new vehicle. With gas prices approaching $5 a gallon in California, my gut tells me that we should set our sights on a hybrid. Upon doing some math, however, I get a different answer.
I priced out a few different vehicles, including the Toyota Camry and the Honda CR-V. In both cases, you pay an all-in premium���including taxes���of about $4,500 to own a hybrid over a similarly equipped model with a conventional engine. As the Camry gets better gas mileage, I selected that vehicle to do some additional calculations.
A conventional Camry gets 34 miles per gallon (MPG) compared to an impressive 46 MPG for the hybrid model. Assuming the current California price per gallon of $4.50 holds, you���d need to drive about 130,000 miles to break even on the hybrid, given the premium price. Interestingly, this is about the same number of miles for which hybrid batteries carry a warranty. In other words, once you���ve broken even, you���ll likely incur several thousand dollars to replace the hybrid battery. The upshot: With a breakeven point of 130,000 miles, I don���t see the hybrid as a financially attractive option.
If fuel prices continue their ascent, however, the math could swing in favor of hybrids. For instance, if California prices hit $6.50 a gallon���which is conceivable given current inflationary pressures���you���d only need to drive 92,000 miles to break even with the hybrid and thereafter you���d pull ahead. While that���s quite a few miles, I know I���ll probably rack up that sort of mileage over the next five years.
One other factor to consider: If gas prices do rise, dealers will likely increase the premium on hybrid models. They know the math that folks like us���readers of HumbleDollar���are doing to determine if hybrid models are worth it, and there���s a chance they���ll stay a step ahead of us in their pricing.
I priced out a few different vehicles, including the Toyota Camry and the Honda CR-V. In both cases, you pay an all-in premium���including taxes���of about $4,500 to own a hybrid over a similarly equipped model with a conventional engine. As the Camry gets better gas mileage, I selected that vehicle to do some additional calculations.
A conventional Camry gets 34 miles per gallon (MPG) compared to an impressive 46 MPG for the hybrid model. Assuming the current California price per gallon of $4.50 holds, you���d need to drive about 130,000 miles to break even on the hybrid, given the premium price. Interestingly, this is about the same number of miles for which hybrid batteries carry a warranty. In other words, once you���ve broken even, you���ll likely incur several thousand dollars to replace the hybrid battery. The upshot: With a breakeven point of 130,000 miles, I don���t see the hybrid as a financially attractive option.
If fuel prices continue their ascent, however, the math could swing in favor of hybrids. For instance, if California prices hit $6.50 a gallon���which is conceivable given current inflationary pressures���you���d only need to drive 92,000 miles to break even with the hybrid and thereafter you���d pull ahead. While that���s quite a few miles, I know I���ll probably rack up that sort of mileage over the next five years.
One other factor to consider: If gas prices do rise, dealers will likely increase the premium on hybrid models. They know the math that folks like us���readers of HumbleDollar���are doing to determine if hybrid models are worth it, and there���s a chance they���ll stay a step ahead of us in their pricing.
The post Hybrid Math appeared first on HumbleDollar.
