Jonathan Clements's Blog, page 255
November 7, 2021
Keeping It
WALL STREET JOURNAL
��personal finance columnist Jason Zweig recently made this observation: Getting rich isn���t the hard part, he said. ���Staying rich is the hard part.���
On the surface, staying rich might seem easy. After all, you simply need to build a balanced portfolio and then withdraw from it at a reasonable rate. Sure, there are stories about��lottery��winners and professional��athletes��going broke. But you might assume that phenomenon���having a hard time staying rich���is limited to such extreme cases.
In my experience, however, it���s a challenge for everyone. That, I think, is because the skills and strategies required to retain wealth are different from those required to build it. What to do? Here are some of the approaches that I���ve seen work well.
Portfolio (Part I).��When it comes to building a portfolio, most people think first about risk. That makes sense. But it���s important to recognize that there���s such a thing as being��too��conservative. You might, for example, feel that the ultimate ���safe��� portfolio would be one invested entirely in U.S. Treasury bonds. While that would certainly offer safety in one respect, it would also be enormously risky���because of the exposure to inflation. Consider that, in just the past 20 years, the dollar has lost about a third of its purchasing power���even though inflation has been historically low. Counterintuitive as it may seem, a key ingredient in maintaining wealth is taking sufficient risk.
Portfolio (Part II).��Back in the fall of 2008, when the financial crisis hit, Harvard University found itself in a difficult position. With a large part of its endowment tied up in hedge funds and illiquid private equity investments, the university faced a cash crunch. It had to��lay off��hundreds of employees. To raise cash in a hurry, the school began selling investments at fire-sale prices. It was a disaster. None of us should make that same mistake. Even if it feels inefficient, keep plenty of cash and bonds, so you can weather a rainy day.
Budgeting.��Mention the word ���budgeting��� and a lot of people recoil. But if your goal is to preserve wealth, especially after you stop working, I favor a form of budgeting. The approach I recommend is to set annual allocations for each of three major spending categories: general household expenses, charitable giving, and gifts to family.
For your household expenses, set up automated transfers from your investment account to your checking account. That���ll ensure that you stay on budget or, at least, highlight when you go over. For charitable giving, I often recommend donor-advised funds for their tax benefits. But they provide another benefit, which is that they make it easy to track contributions and donations on a year-to-date basis. What about gifts to family? Try to complete the gifts once a year���and all at once. In combination, these three strategies should help you stay on budget without the pain of a traditional budget.
Spending.��The expression ���penny wise, pound foolish��� sounds elementary. But in recent decades, certain��categories��of expenses have dramatically exceeded others. Foremost among them: college tuition, which has risen at an egregious rate. As I���ve��noted��before, tuition represents the single biggest obstacle to many families��� financial security. Fortunately, it���s not mandatory to pay $80,000 a year. There���s now��more data��with which to make informed college choices. If you can contain big expenses like this, that might pack more punch than a lifetime of penny-pinching on everything else.
Creative solutions.��Economists like to talk about the $20 bill��theorem. It says that you never find money simply lying on the ground because somebody else would have already picked it up. By the same token, it may not seem worth the effort to look for ways to substantially cut your budget or increase your income. But both exist.
Consider my friend���let���s call him Jim���who has two children a year apart in age. Recognizing the way the college aid��formula��works, Jim convinced his older child to take a gap year after high school. The result: Both children went through college during the same four years, yielding Jim tens of thousands of dollars of additional aid.
Taxes (Part I).��In retirement, taxes represent a double-edged sword. On the one hand, retirees have much more control over their tax rate. On the other hand, it requires a fair amount of diligence on an annual basis to exercise that control. What to do? Work with your accountant or advisor���or both���to develop a tax-smart ���decumulation��� plan for your annual withdrawals from savings.
Taxes (Part II).��If you���re still working and have charitable intentions, a useful tax strategy is to front-load a donor-advised fund. Suppose your annual giving totals $5,000 a year. You could continue to give at that rate into retirement, but the value of the tax deduction will likely fall���and it may even be��eliminated. An alternative: If you���re well-heeled, you might consider making one big contribution���say, $50,000 or $100,000���to a donor-advised fund in your last year on the job. That way, you���d get a huge deduction at a high tax rate. You could then dole out that sum in $5,000 annual increments during your retirement.
Insurance.��Most of us understand the importance of life and disability insurance, but it���s good to review these periodically. During the first half of your career, you might need to bump up coverage levels periodically. In the second half, your accumulated savings might allow you to decrease coverage. Another insurance recommendation: Secure plenty of��umbrella��coverage.
Plan B (and C).��In making a financial plan, I always find it useful to ask what levers would be available if things don't go according to plan. Could you downsize or sell a second home? Liquidate a life insurance policy? Request more college financial aid from the bursar���s office? Secure a reverse mortgage? None of these is pleasant to think about. But I���ve found it���s easier to sleep at night if you know what financial levers are at your disposal.
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.
On the surface, staying rich might seem easy. After all, you simply need to build a balanced portfolio and then withdraw from it at a reasonable rate. Sure, there are stories about��lottery��winners and professional��athletes��going broke. But you might assume that phenomenon���having a hard time staying rich���is limited to such extreme cases.
In my experience, however, it���s a challenge for everyone. That, I think, is because the skills and strategies required to retain wealth are different from those required to build it. What to do? Here are some of the approaches that I���ve seen work well.
Portfolio (Part I).��When it comes to building a portfolio, most people think first about risk. That makes sense. But it���s important to recognize that there���s such a thing as being��too��conservative. You might, for example, feel that the ultimate ���safe��� portfolio would be one invested entirely in U.S. Treasury bonds. While that would certainly offer safety in one respect, it would also be enormously risky���because of the exposure to inflation. Consider that, in just the past 20 years, the dollar has lost about a third of its purchasing power���even though inflation has been historically low. Counterintuitive as it may seem, a key ingredient in maintaining wealth is taking sufficient risk.
Portfolio (Part II).��Back in the fall of 2008, when the financial crisis hit, Harvard University found itself in a difficult position. With a large part of its endowment tied up in hedge funds and illiquid private equity investments, the university faced a cash crunch. It had to��lay off��hundreds of employees. To raise cash in a hurry, the school began selling investments at fire-sale prices. It was a disaster. None of us should make that same mistake. Even if it feels inefficient, keep plenty of cash and bonds, so you can weather a rainy day.
Budgeting.��Mention the word ���budgeting��� and a lot of people recoil. But if your goal is to preserve wealth, especially after you stop working, I favor a form of budgeting. The approach I recommend is to set annual allocations for each of three major spending categories: general household expenses, charitable giving, and gifts to family.
For your household expenses, set up automated transfers from your investment account to your checking account. That���ll ensure that you stay on budget or, at least, highlight when you go over. For charitable giving, I often recommend donor-advised funds for their tax benefits. But they provide another benefit, which is that they make it easy to track contributions and donations on a year-to-date basis. What about gifts to family? Try to complete the gifts once a year���and all at once. In combination, these three strategies should help you stay on budget without the pain of a traditional budget.
Spending.��The expression ���penny wise, pound foolish��� sounds elementary. But in recent decades, certain��categories��of expenses have dramatically exceeded others. Foremost among them: college tuition, which has risen at an egregious rate. As I���ve��noted��before, tuition represents the single biggest obstacle to many families��� financial security. Fortunately, it���s not mandatory to pay $80,000 a year. There���s now��more data��with which to make informed college choices. If you can contain big expenses like this, that might pack more punch than a lifetime of penny-pinching on everything else.
Creative solutions.��Economists like to talk about the $20 bill��theorem. It says that you never find money simply lying on the ground because somebody else would have already picked it up. By the same token, it may not seem worth the effort to look for ways to substantially cut your budget or increase your income. But both exist.
Consider my friend���let���s call him Jim���who has two children a year apart in age. Recognizing the way the college aid��formula��works, Jim convinced his older child to take a gap year after high school. The result: Both children went through college during the same four years, yielding Jim tens of thousands of dollars of additional aid.
Taxes (Part I).��In retirement, taxes represent a double-edged sword. On the one hand, retirees have much more control over their tax rate. On the other hand, it requires a fair amount of diligence on an annual basis to exercise that control. What to do? Work with your accountant or advisor���or both���to develop a tax-smart ���decumulation��� plan for your annual withdrawals from savings.
Taxes (Part II).��If you���re still working and have charitable intentions, a useful tax strategy is to front-load a donor-advised fund. Suppose your annual giving totals $5,000 a year. You could continue to give at that rate into retirement, but the value of the tax deduction will likely fall���and it may even be��eliminated. An alternative: If you���re well-heeled, you might consider making one big contribution���say, $50,000 or $100,000���to a donor-advised fund in your last year on the job. That way, you���d get a huge deduction at a high tax rate. You could then dole out that sum in $5,000 annual increments during your retirement.
Insurance.��Most of us understand the importance of life and disability insurance, but it���s good to review these periodically. During the first half of your career, you might need to bump up coverage levels periodically. In the second half, your accumulated savings might allow you to decrease coverage. Another insurance recommendation: Secure plenty of��umbrella��coverage.
Plan B (and C).��In making a financial plan, I always find it useful to ask what levers would be available if things don't go according to plan. Could you downsize or sell a second home? Liquidate a life insurance policy? Request more college financial aid from the bursar���s office? Secure a reverse mortgage? None of these is pleasant to think about. But I���ve found it���s easier to sleep at night if you know what financial levers are at your disposal.
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 Keeping It appeared first on HumbleDollar.
November 6, 2021
Not Too Late
HEALTH SAVINGS accounts are frequently praised on HumbleDollar���with good reason. A lesser-known benefit: Health savings accounts, or HSAs, can be a boon for new employees, thanks to the last-month rule.
What���s that? If you have a qualifying high deductible health plan (HDHP) as of Dec. 1, you���re eligible to make a full-year HSA contribution, even if you only just bought an HDHP. On top of that, if you continue HDHP coverage, you can make a full HSA contribution for the following year. The downside: You have to keep qualifying coverage for the next year or you could trigger taxes and penalties on the HSA contributions made under the last-month rule.
I took advantage of the last-month rule when I swapped from a contract job to a permanent role in 2013. Since then, I���ve made it a goal to always contribute up to the annual HSA maximum. With some decent stock market returns, my HSA has swelled to more than $50,000. My plan is to let the account grow over the decades and then reimburse myself when I���m a healthy old man (knock on wood).
Since first opening an HSA, the only major health-related expense I���ve incurred was an elective $3,300 Lasik procedure in 2018. I planned ahead and paid with a 2% cashback credit card, while leaving my HSA untapped. Fear not: I paid off my hefty credit card balance in full later that month.
Another tip: If you can, it���s best to contribute to an HSA through your employer���s payroll system. That way, you can avoid that pesky 7.65% payroll tax. An added bonus: Many employers match an employee���s HSA contributions.
What���s that? If you have a qualifying high deductible health plan (HDHP) as of Dec. 1, you���re eligible to make a full-year HSA contribution, even if you only just bought an HDHP. On top of that, if you continue HDHP coverage, you can make a full HSA contribution for the following year. The downside: You have to keep qualifying coverage for the next year or you could trigger taxes and penalties on the HSA contributions made under the last-month rule.
I took advantage of the last-month rule when I swapped from a contract job to a permanent role in 2013. Since then, I���ve made it a goal to always contribute up to the annual HSA maximum. With some decent stock market returns, my HSA has swelled to more than $50,000. My plan is to let the account grow over the decades and then reimburse myself when I���m a healthy old man (knock on wood).
Since first opening an HSA, the only major health-related expense I���ve incurred was an elective $3,300 Lasik procedure in 2018. I planned ahead and paid with a 2% cashback credit card, while leaving my HSA untapped. Fear not: I paid off my hefty credit card balance in full later that month.
Another tip: If you can, it���s best to contribute to an HSA through your employer���s payroll system. That way, you can avoid that pesky 7.65% payroll tax. An added bonus: Many employers match an employee���s HSA contributions.
The post Not Too Late appeared first on HumbleDollar.
November 5, 2021
A Real Saint
I���D ALWAYS THOUGHT that saints were long-ago martyrs, those people shown in paintings in the Louvre or the Prado.
That���s why I was surprised to find a plaque honoring a 20th century saint at the church I attend in Newcastle, Maine. The saint, Frances Perkins, had worshipped at that very church, St. Andrew���s Episcopal, until her death in 1965.
Who was Frances Perkins? My friends often draw a blank at the name, although she helped shape our lives. Perkins was a young social worker when she met Franklin Delano Roosevelt at a tea dance in 1910. She was passionately interested in improving the lives of poor workers and immigrants.
FDR took Perkins with him into government, starting when he was governor of New York. He named her Secretary of Labor in 1933, the first woman ever to serve in a U.S. president���s cabinet. That���s not why Perkins was made a saint, however.
Before she accepted the Labor Secretary���s job, she met with Roosevelt to tell him what she wanted to accomplish. She wanted to end child labor. She wanted to create a minimum wage. She wanted limits on working hours. She wanted unemployment insurance. And she wanted a system of pensions that would provide dignity to workers in old age.
Roosevelt told her he wondered if labor regulation was even constitutional. When she brought up the idea of pensions, Roosevelt broke in: ���You know, Frances, I don���t believe in the dole and I never will.���
Still, in the end, Roosevelt told her to go ahead and try. ���You have to invent the way to do these things,��� he told her. ���Don���t expect too much help from me.���
Amazingly, Perkins���with Roosevelt���s subsequent support���succeeded. She chaired the committee that led to the creation of Social Security in 1935. She was also a leading force behind the Fair Labor Standards Act of 1938. It helped create the minimum wage, the 40-hour week, overtime pay and put an end to child labor in factories.
Perkins���s Christian faith was the inspiration for her actions, according to her biographer, George Martin. She rarely spoke in religious terms, however, ���because she knew they made many people nervous.��� ��She was named��a saint by the Episcopal Church in 2009.
Perkins didn���t achieve all of her ambitions, by the way. She also wanted universal health care.
What a saint.
That���s why I was surprised to find a plaque honoring a 20th century saint at the church I attend in Newcastle, Maine. The saint, Frances Perkins, had worshipped at that very church, St. Andrew���s Episcopal, until her death in 1965.
Who was Frances Perkins? My friends often draw a blank at the name, although she helped shape our lives. Perkins was a young social worker when she met Franklin Delano Roosevelt at a tea dance in 1910. She was passionately interested in improving the lives of poor workers and immigrants.
FDR took Perkins with him into government, starting when he was governor of New York. He named her Secretary of Labor in 1933, the first woman ever to serve in a U.S. president���s cabinet. That���s not why Perkins was made a saint, however.
Before she accepted the Labor Secretary���s job, she met with Roosevelt to tell him what she wanted to accomplish. She wanted to end child labor. She wanted to create a minimum wage. She wanted limits on working hours. She wanted unemployment insurance. And she wanted a system of pensions that would provide dignity to workers in old age.
Roosevelt told her he wondered if labor regulation was even constitutional. When she brought up the idea of pensions, Roosevelt broke in: ���You know, Frances, I don���t believe in the dole and I never will.���
Still, in the end, Roosevelt told her to go ahead and try. ���You have to invent the way to do these things,��� he told her. ���Don���t expect too much help from me.���
Amazingly, Perkins���with Roosevelt���s subsequent support���succeeded. She chaired the committee that led to the creation of Social Security in 1935. She was also a leading force behind the Fair Labor Standards Act of 1938. It helped create the minimum wage, the 40-hour week, overtime pay and put an end to child labor in factories.
Perkins���s Christian faith was the inspiration for her actions, according to her biographer, George Martin. She rarely spoke in religious terms, however, ���because she knew they made many people nervous.��� ��She was named��a saint by the Episcopal Church in 2009.
Perkins didn���t achieve all of her ambitions, by the way. She also wanted universal health care.
What a saint.
The post A Real Saint appeared first on HumbleDollar.
When Cash Is King
YIELDS ON SAFE investments���namely Treasurys, certificates of deposit, savings accounts and money market funds���are in the basement. Yes, Series I savings bonds currently offer an annualized 7.12%. But that rate is only guaranteed for six months, plus regular purchases are limited to $10,000 a year.
���Where can I go for yield?��� goes the cry heard throughout the land. Nowhere, of course. As put by money manager Raymond DeVoe Jr., ���More money has been lost reaching for yield than at the point of a gun.���
Still, I have a more optimistic take. My contention: The safe assets in your portfolio have the potential to be its highest returning components.
Let me explain. Decades of data show that the owners of mutual funds underperform, on a dollar-weighted basis, their conventionally calculated time-weighted returns by a percent or two per year. Why? They chase performance, buying high and selling low.
Ever wonder who���s taking the other side of their trades? I don���t know for sure���but I���ve often suspected, by process of elimination, that it���s corporate insiders and very wealthy private individuals. That brings me to three quotes, all from the 1930s.
The first was supplied to me by economic historian Richard Sylla, who forwarded to me a pretty good description of how this happens. The description comes from Matthew Josephson���s Depression-era classic,�� The Robber Barons , which was first published in 1934.
During a market panic, writes Josephson, ���There are many casualties, cruel transfers of individual fortunes. Yet he who possesses even a modicum of unimpaired capital is as one who watches the sand run down in an hourglass, while fully aware that he may, at the given moment, turn the glass over and begin the process anew.���
The second quote comes from a young Ohio lawyer named Benjamin Roth. He observed in 1931 that, ���A very conservative young married man with a large family to support tells me that during the past 10 years he succeeded in paying off the mortgage on his house. A few weeks ago, he placed a new mortgage on it for $5,000 and invested the proceeds in good stocks for long-term investment. I think in two or three years he will show a handsome profit. It is generally believed that good stocks and bonds can now be bought at very attractive prices.��The difficulty is that no one has the cash to buy.��� (Italics added.)
Our final quote is from the great Benjamin Graham, author of The Intelligent Investor . In 1932, he wrote in Forbes that, ���Those with enterprise haven���t the money, and those with money haven���t the enterprise, to buy stocks when they are cheap.��� ��
Graham���s phrasing is perhaps a little archaic. By ���enterprise,��� he meant cojones, which is perhaps also archaic, but more accurate. Summarizing all three, those with the most cash at a market bottom���Josephson���s "unimpaired capital"���are the ones taking stocks off the hands of the hapless masses.
In my mind���s eye, I can picture the modern incarnation of Josephson���s fat cat owner of unimpaired capital: someone with decades of investment experience who doesn���t necessarily possess the power to time the market���no one does���but who does know that the most spectacular returns are often earned in the first few days or weeks following a market bottom. She also has a large balanced portfolio, with a large amount of stocks that have benefited from high long-term returns, and also enough cash to sleep like a baby when things look the worst.
This point cannot be emphasized enough: If you have enough cash to pay your living expenses for many, many years, you���ll have no trouble holding onto your stocks for the long run and so reaping their rewards, and likely have some boodle left over to buy more during the inevitable fire-sales.
If the data on dollar-weighted vs. time-weighted returns are to be believed, our fat cat has most likely purchased her stocks in the form of mutual fund shares from panicked 401(k) and IRA owners, and she will likely sell them back to those same folks after the smoke clears and prices have risen. In the era of defined-contribution retirement plan investing, this is how the rich get richer.
The political economy of this upward redistribution of wealth is well beyond the scope of this essay. But for ordinary investors, the moral is clear: To prosper, one needs industrial quantities of patience, cash and courage���in that order.
Latest Posts
HERE ARE THE SIX other articles published by HumbleDollar this week:
Want to improve your health and personal finances? Howard Rohleder makes the case for QI���the process of continuous quality improvement that originated in Japanese manufacturing.
"That brings us to the Holy Grail of sludge busting���making tax preparation easy," writes Greg Spears. ���The forms are so daunting that 94% use a tax preparer, either a human or a computer program."
Are you considering a career change, a gap year or early retirement? You should ask yourself four key financial questions, says Matt Trogdon.
Why rush? With financial decisions, it sometimes makes sense to��move slowly. Adam Grossman offers eight examples.
With work winding down, Rick Connor and his wife are fine-tuning their retirement plan. One unanswered question: Whose IRA should they draw money from first?
What got eyeballs in October? Check out the seven most popular articles on HumbleDollar last month.
Also be sure to check out the past week's��blog posts, including John Lim on low interest rates, Dick Quinn on high-priced stuff, Dennis Friedman on travel, Jim Wasserman on home repairs, Mike Zaccardi on cash yields��and John Goodell on technological disruption.
Bill Bernstein is a recovering neurologist, author and co-founder of Efficient Frontier Advisors. He���s contributed to peer-reviewed finance journals and has written for national publications, including Money magazine and The Wall Street Journal. Bill has produced several finance books, including The Four Pillars of Investing, and also four volumes of history, the latest of which is The Delusions of Crowds. His life's goal is to convey a suitcase full of books and a laptop to Provence for six months���and call it ���work.���
���Where can I go for yield?��� goes the cry heard throughout the land. Nowhere, of course. As put by money manager Raymond DeVoe Jr., ���More money has been lost reaching for yield than at the point of a gun.���
Still, I have a more optimistic take. My contention: The safe assets in your portfolio have the potential to be its highest returning components.
Let me explain. Decades of data show that the owners of mutual funds underperform, on a dollar-weighted basis, their conventionally calculated time-weighted returns by a percent or two per year. Why? They chase performance, buying high and selling low.
Ever wonder who���s taking the other side of their trades? I don���t know for sure���but I���ve often suspected, by process of elimination, that it���s corporate insiders and very wealthy private individuals. That brings me to three quotes, all from the 1930s.
The first was supplied to me by economic historian Richard Sylla, who forwarded to me a pretty good description of how this happens. The description comes from Matthew Josephson���s Depression-era classic,�� The Robber Barons , which was first published in 1934.
During a market panic, writes Josephson, ���There are many casualties, cruel transfers of individual fortunes. Yet he who possesses even a modicum of unimpaired capital is as one who watches the sand run down in an hourglass, while fully aware that he may, at the given moment, turn the glass over and begin the process anew.���
The second quote comes from a young Ohio lawyer named Benjamin Roth. He observed in 1931 that, ���A very conservative young married man with a large family to support tells me that during the past 10 years he succeeded in paying off the mortgage on his house. A few weeks ago, he placed a new mortgage on it for $5,000 and invested the proceeds in good stocks for long-term investment. I think in two or three years he will show a handsome profit. It is generally believed that good stocks and bonds can now be bought at very attractive prices.��The difficulty is that no one has the cash to buy.��� (Italics added.)
Our final quote is from the great Benjamin Graham, author of The Intelligent Investor . In 1932, he wrote in Forbes that, ���Those with enterprise haven���t the money, and those with money haven���t the enterprise, to buy stocks when they are cheap.��� ��
Graham���s phrasing is perhaps a little archaic. By ���enterprise,��� he meant cojones, which is perhaps also archaic, but more accurate. Summarizing all three, those with the most cash at a market bottom���Josephson���s "unimpaired capital"���are the ones taking stocks off the hands of the hapless masses.
In my mind���s eye, I can picture the modern incarnation of Josephson���s fat cat owner of unimpaired capital: someone with decades of investment experience who doesn���t necessarily possess the power to time the market���no one does���but who does know that the most spectacular returns are often earned in the first few days or weeks following a market bottom. She also has a large balanced portfolio, with a large amount of stocks that have benefited from high long-term returns, and also enough cash to sleep like a baby when things look the worst.
This point cannot be emphasized enough: If you have enough cash to pay your living expenses for many, many years, you���ll have no trouble holding onto your stocks for the long run and so reaping their rewards, and likely have some boodle left over to buy more during the inevitable fire-sales.
If the data on dollar-weighted vs. time-weighted returns are to be believed, our fat cat has most likely purchased her stocks in the form of mutual fund shares from panicked 401(k) and IRA owners, and she will likely sell them back to those same folks after the smoke clears and prices have risen. In the era of defined-contribution retirement plan investing, this is how the rich get richer.
The political economy of this upward redistribution of wealth is well beyond the scope of this essay. But for ordinary investors, the moral is clear: To prosper, one needs industrial quantities of patience, cash and courage���in that order.
Latest Posts
HERE ARE THE SIX other articles published by HumbleDollar this week:
Want to improve your health and personal finances? Howard Rohleder makes the case for QI���the process of continuous quality improvement that originated in Japanese manufacturing.
"That brings us to the Holy Grail of sludge busting���making tax preparation easy," writes Greg Spears. ���The forms are so daunting that 94% use a tax preparer, either a human or a computer program."
Are you considering a career change, a gap year or early retirement? You should ask yourself four key financial questions, says Matt Trogdon.
Why rush? With financial decisions, it sometimes makes sense to��move slowly. Adam Grossman offers eight examples.
With work winding down, Rick Connor and his wife are fine-tuning their retirement plan. One unanswered question: Whose IRA should they draw money from first?
What got eyeballs in October? Check out the seven most popular articles on HumbleDollar last month.
Also be sure to check out the past week's��blog posts, including John Lim on low interest rates, Dick Quinn on high-priced stuff, Dennis Friedman on travel, Jim Wasserman on home repairs, Mike Zaccardi on cash yields��and John Goodell on technological disruption.
Bill Bernstein is a recovering neurologist, author and co-founder of Efficient Frontier Advisors. He���s contributed to peer-reviewed finance journals and has written for national publications, including Money magazine and The Wall Street Journal. Bill has produced several finance books, including The Four Pillars of Investing, and also four volumes of history, the latest of which is The Delusions of Crowds. His life's goal is to convey a suitcase full of books and a laptop to Provence for six months���and call it ���work.���The post When Cash Is King appeared first on HumbleDollar.
Sludge vs. Nudge
IF YOU WANT PEOPLE to do something, make it easy. That���s the big idea behind a nudge, which helps people do the right thing for themselves. It turns out that nudge has an evil twin, called sludge. Sludge makes the right thing harder to do. If you look around, sludge is everywhere.
���If you cannot get financial aid without filling out a twenty-page form, then you have been subjected to sludge,��� behavioral economists Richard Thaler and Cass Sunstein write in the new ���final��� edition of their bestselling book Nudge. ���If you cannot obtain a student visa without having four rounds of interviews, you are facing sludge.���
Sludge has gone by many names in the past: red tape, bureaucracy, paperwork. Whatever you call it, it���s annoying. So what���s new? Thaler and Sunstein argue that policymakers can achieve great things at a small cost by clearing sludge away. Things like reducing childhood poverty and saving lives, as you���ll see.
But first, why is sludge there?
Sometimes, it���s an honest attempt to ration scarce resources. I registered for a COVID-19 vaccine last winter. Nursing home residents, health care professionals, K-12 teachers and smokers were given higher priority. I waited in line for the greater good of my community.
Other sludge is created to deliberately trip us up. Thaler offers this example: He wanted to read a review of his book in a London newspaper, which had a paywall. A one-month trial cost just ��1, payable by credit card. Easy. After that came the sludge: The subscription would automatically renew at ��27 pounds per month. To cancel, he writes, ���You had to call the London office, not on a toll-free line, during London business hours!��� Thaler, who lives is in Chicago, passed on the trial.
Another sludgy business practice is mail-in rebates. The promise of a discount may move merchandise because 80% of us think we���ll have our rebate within 30 days. Problem is, only 10% to 40% of buyers will jump through all the hoops required to get that rebate check. In one study, consumers were clearly told about this in an effort to motivate them. It had zero effect.
���There is a general (sad) lesson here,��� Thaler and Sunstein conclude. ���Telling people that some activity is dangerous (running up large credit card bills, binge drinking, unprotected sex)��� is not much help.��� The only intervention that reliably works, they say, is ���the magic elixir��� of making it easy. When the rebate form was made easier to mail, the redemption rate rose to about 54%.
Sometimes sludge is just senseless���even when lives are at stake. Opioid overdoses killed a record 93,331��Americans in 2020. Yet doctors couldn���t prescribe Suboxone, the gold standard treatment for heroin addiction, without an ���X waiver��� from the federal government.
Many busy doctors didn���t complete the lengthy training required for a waiver, Sunstein notes in his own new book, called Sludge . They might stabilize an overdosing patient in the emergency room, he writes, but���because they didn���t have the waiver���they were prevented from prescribing long-term treatment. Citing the belief that this sludge costs lives, the Secretary of Health and Human Services waived��the waiver last April.
Sludge-busting is having a moment right now in Washington. Rather than requiring parents to file taxes to get the child tax credit, the government is paying it��forward. If you qualified in 2020, it reasoned, you���d likely qualify again in 2021.
The IRS is direct depositing monthly checks in parents��� bank accounts from July to December in a one-year experiment. More poor households were made eligible for the child tax credit as well, and payments��increased from $2,000 to up to $3,600 annually. The combined effect has reduced U.S. child poverty by 25%, according to an early analysis by researchers at Columbia University.
Parents will have to file a tax return to claim the credit again next year, however, unless legislation is passed to make the experiment permanent. That brings us to the Holy Grail of sludge busting���making tax preparation easy. Americans spend 13 hours a year, on average, filling out tax forms. The forms are so daunting that 94% use a tax preparer, either a human or a computer program.
It doesn���t have to be this way. The IRS has all the information it needs to prepopulate simple tax returns for millions of��taxpayers, according to Austan Goolsbee, former chair of the President���s Council of Economic Advisors. Thaler and Sunstein estimate that 90% of us have such simple returns that we could use such a service.
Thirty-six nations already practice this kind of form-free tax filing for some of its citizens, according to the Tax Policy Center. Almost three-quarters of Swedish citizens get a completed tax return in the mail from the government, for example. They might spend 15 minutes double-checking the numbers before signing the return by sending a text message.
Greg Spears worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger���s Personal Finance magazine. After leaving journalism, he spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. Greg currently teaches behavioral economics at St. Joseph���s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. He is also a Certified Financial Planner certificate holder. Check out Greg's earlier articles.
���If you cannot get financial aid without filling out a twenty-page form, then you have been subjected to sludge,��� behavioral economists Richard Thaler and Cass Sunstein write in the new ���final��� edition of their bestselling book Nudge. ���If you cannot obtain a student visa without having four rounds of interviews, you are facing sludge.���
Sludge has gone by many names in the past: red tape, bureaucracy, paperwork. Whatever you call it, it���s annoying. So what���s new? Thaler and Sunstein argue that policymakers can achieve great things at a small cost by clearing sludge away. Things like reducing childhood poverty and saving lives, as you���ll see.
But first, why is sludge there?
Sometimes, it���s an honest attempt to ration scarce resources. I registered for a COVID-19 vaccine last winter. Nursing home residents, health care professionals, K-12 teachers and smokers were given higher priority. I waited in line for the greater good of my community.
Other sludge is created to deliberately trip us up. Thaler offers this example: He wanted to read a review of his book in a London newspaper, which had a paywall. A one-month trial cost just ��1, payable by credit card. Easy. After that came the sludge: The subscription would automatically renew at ��27 pounds per month. To cancel, he writes, ���You had to call the London office, not on a toll-free line, during London business hours!��� Thaler, who lives is in Chicago, passed on the trial.
Another sludgy business practice is mail-in rebates. The promise of a discount may move merchandise because 80% of us think we���ll have our rebate within 30 days. Problem is, only 10% to 40% of buyers will jump through all the hoops required to get that rebate check. In one study, consumers were clearly told about this in an effort to motivate them. It had zero effect.
���There is a general (sad) lesson here,��� Thaler and Sunstein conclude. ���Telling people that some activity is dangerous (running up large credit card bills, binge drinking, unprotected sex)��� is not much help.��� The only intervention that reliably works, they say, is ���the magic elixir��� of making it easy. When the rebate form was made easier to mail, the redemption rate rose to about 54%.
Sometimes sludge is just senseless���even when lives are at stake. Opioid overdoses killed a record 93,331��Americans in 2020. Yet doctors couldn���t prescribe Suboxone, the gold standard treatment for heroin addiction, without an ���X waiver��� from the federal government.
Many busy doctors didn���t complete the lengthy training required for a waiver, Sunstein notes in his own new book, called Sludge . They might stabilize an overdosing patient in the emergency room, he writes, but���because they didn���t have the waiver���they were prevented from prescribing long-term treatment. Citing the belief that this sludge costs lives, the Secretary of Health and Human Services waived��the waiver last April.
Sludge-busting is having a moment right now in Washington. Rather than requiring parents to file taxes to get the child tax credit, the government is paying it��forward. If you qualified in 2020, it reasoned, you���d likely qualify again in 2021.
The IRS is direct depositing monthly checks in parents��� bank accounts from July to December in a one-year experiment. More poor households were made eligible for the child tax credit as well, and payments��increased from $2,000 to up to $3,600 annually. The combined effect has reduced U.S. child poverty by 25%, according to an early analysis by researchers at Columbia University.
Parents will have to file a tax return to claim the credit again next year, however, unless legislation is passed to make the experiment permanent. That brings us to the Holy Grail of sludge busting���making tax preparation easy. Americans spend 13 hours a year, on average, filling out tax forms. The forms are so daunting that 94% use a tax preparer, either a human or a computer program.
It doesn���t have to be this way. The IRS has all the information it needs to prepopulate simple tax returns for millions of��taxpayers, according to Austan Goolsbee, former chair of the President���s Council of Economic Advisors. Thaler and Sunstein estimate that 90% of us have such simple returns that we could use such a service.
Thirty-six nations already practice this kind of form-free tax filing for some of its citizens, according to the Tax Policy Center. Almost three-quarters of Swedish citizens get a completed tax return in the mail from the government, for example. They might spend 15 minutes double-checking the numbers before signing the return by sending a text message.
Greg Spears worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger���s Personal Finance magazine. After leaving journalism, he spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. Greg currently teaches behavioral economics at St. Joseph���s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. He is also a Certified Financial Planner certificate holder. Check out Greg's earlier articles.The post Sludge vs. Nudge appeared first on HumbleDollar.
November 4, 2021
Just Because
WHAT SEEMS OBVIOUS isn���t always true. Here are seven examples from the financial world:
Just because an investment has performed well doesn���t mean that���s a good guide to the future. This is usually mentioned with regard to stocks. But today, my bigger concern is folks who are extrapolating past bond fund returns. Their strong past performance was driven by a huge drop in interest rates over the past four decades���something that can���t be repeated starting from 2021���s tiny yields.
Just because it���s a safe investment doesn���t mean you won���t lose money. Today, after inflation and taxes, cash investments and many high-quality bonds look like a sure bet to lose money.
Just because you���ve notched spectacular investment returns doesn���t mean you���ve made wise investment decisions. In fact, just the opposite is likely true. Huge short-term gains are almost always a sign of a risky, badly diversified portfolio.
Just because it���s a government bond doesn���t mean it���s as safe as Treasurys. Recall what happened in February and March 2020. Even as Treasurys proved to be a safe haven during the pandemic-induced economic and market swoon, municipal bonds got pummeled.
Just because you���re paying minimal taxes doesn���t mean you���re being financially smart. For instance, many seniors find themselves paying little or no tax in their initial retirement years because they���re living off their taxable account, while avoiding withdrawals from their retirement accounts. But if that means a much higher tax rate from age 72 on, when required minimum distributions (RMDs) from their retirement accounts kick in, they���re likely making a big mistake���and they should be using those early retirement years to whittle down their traditional IRA, either by making withdrawals or by��converting part of their IRA to a Roth.
Just because an IRA withdrawal is mandated doesn���t mean you should spend that amount. Those taking RMDs can always opt to reinvest a portion of their withdrawals in a regular taxable account. That said, RMDs seem to be a pretty good guide to drawing down a portfolio because they take life expectancy into account.
Just because you���re retired doesn���t mean you should claim Social Security. Quitting the workforce and claiming Social Security should be two separate decisions���and the wise choice is often to delay benefits until age 70, especially if you���re the family���s main breadwinner.
Just because an investment has performed well doesn���t mean that���s a good guide to the future. This is usually mentioned with regard to stocks. But today, my bigger concern is folks who are extrapolating past bond fund returns. Their strong past performance was driven by a huge drop in interest rates over the past four decades���something that can���t be repeated starting from 2021���s tiny yields.
Just because it���s a safe investment doesn���t mean you won���t lose money. Today, after inflation and taxes, cash investments and many high-quality bonds look like a sure bet to lose money.
Just because you���ve notched spectacular investment returns doesn���t mean you���ve made wise investment decisions. In fact, just the opposite is likely true. Huge short-term gains are almost always a sign of a risky, badly diversified portfolio.
Just because it���s a government bond doesn���t mean it���s as safe as Treasurys. Recall what happened in February and March 2020. Even as Treasurys proved to be a safe haven during the pandemic-induced economic and market swoon, municipal bonds got pummeled.
Just because you���re paying minimal taxes doesn���t mean you���re being financially smart. For instance, many seniors find themselves paying little or no tax in their initial retirement years because they���re living off their taxable account, while avoiding withdrawals from their retirement accounts. But if that means a much higher tax rate from age 72 on, when required minimum distributions (RMDs) from their retirement accounts kick in, they���re likely making a big mistake���and they should be using those early retirement years to whittle down their traditional IRA, either by making withdrawals or by��converting part of their IRA to a Roth.
Just because an IRA withdrawal is mandated doesn���t mean you should spend that amount. Those taking RMDs can always opt to reinvest a portion of their withdrawals in a regular taxable account. That said, RMDs seem to be a pretty good guide to drawing down a portfolio because they take life expectancy into account.
Just because you���re retired doesn���t mean you should claim Social Security. Quitting the workforce and claiming Social Security should be two separate decisions���and the wise choice is often to delay benefits until age 70, especially if you���re the family���s main breadwinner.
The post Just Because appeared first on HumbleDollar.
Fountain of Youth
DURING THE PANDEMIC, I���ve taken to reading the obituaries. I especially enjoy the stories about people who lived a long time. What I���ve found is that many of them volunteered in some fashion or continued to work until late in life. Most didn���t do it because of the money. They did it because it gave them a sense of purpose.
I���ve come to believe that doing work that we love and have a passion for���that���s meaningful to us���serves as our own personal ���fountain of youth.���
Ask yourself: Why do rich people, like Charlie Munger at age 97 and Warren Buffett at age 91, continue to work when they have more money than they���ll ever need? My hunch: They work because it makes them feel useful and gives them a sense of purpose.��They love what they do. It excites them and makes them want to get out of bed in the morning. Their work keeps them youthful and energized. Sitting on a couch watching TV doesn���t do that for them���or for many other people, I suspect.
In fact, a recent poll found that 93% of the retirees surveyed believed it���s important to feel useful in retirement and 87% agreed that "being useful helps them to feel youthful.��� As I���ve argued before, purpose is something that we all need until our dying days���and having great wealth doesn't change that.
I���ve come to believe that doing work that we love and have a passion for���that���s meaningful to us���serves as our own personal ���fountain of youth.���
Ask yourself: Why do rich people, like Charlie Munger at age 97 and Warren Buffett at age 91, continue to work when they have more money than they���ll ever need? My hunch: They work because it makes them feel useful and gives them a sense of purpose.��They love what they do. It excites them and makes them want to get out of bed in the morning. Their work keeps them youthful and energized. Sitting on a couch watching TV doesn���t do that for them���or for many other people, I suspect.
In fact, a recent poll found that 93% of the retirees surveyed believed it���s important to feel useful in retirement and 87% agreed that "being useful helps them to feel youthful.��� As I���ve argued before, purpose is something that we all need until our dying days���and having great wealth doesn't change that.
The post Fountain of Youth appeared first on HumbleDollar.
YouTube, You Save
GOT SOMETHING THAT needs repairing? Faced with the increasing specialization of people���s knowledge, ever-growing technical complexity and our perennial lack of time, it���s often tempting to just call in an expert or even buy a replacement.
But repairs can be costly, which is why we���re told to get multiple bids. One of the ���bid��� options I always check out: fixing it myself with the guidance of that repository of collective step-by-step knowhow, YouTube. Perhaps not since the Great Library of Alexandria has so much expertise been collected in one spot���along, of course, with endless cat videos and slick dance moves.
Battery for the car key fob gone dead? YouTube plus $5 for the battery beats $20 at the dealer. Repairing a gate latch becomes a choice between installing an $18 latch delivered by Amazon or paying $100 for a guy to come out. Same thing with a leaky showerhead. I recently called about a garage door repair. The repairman said he charged $80 just to come out, which would be over and above the cost to repair.
Perhaps best of all, there���s that feeling of accomplishment from having both mastered a new skill and saved some cash. As a retiree, I love the small challenges involved. My peers sometimes shrug about broken things and say they never learned to do repairs. But is it ever too late to start learning? A fence repair became a family activity with my sons. My daughter-in-law to be���a baker���changed the oil on her car, courtesy of YouTube tutelage. She was so excited she offered to do ours.
Strikes me as a good thing: You learn skills, exercise the mind���and save money. Or, as Ben Franklin supposedly said, ���Watch the pennies and the dollars will take care of themselves.��� But it seems he got that off the internet.
But repairs can be costly, which is why we���re told to get multiple bids. One of the ���bid��� options I always check out: fixing it myself with the guidance of that repository of collective step-by-step knowhow, YouTube. Perhaps not since the Great Library of Alexandria has so much expertise been collected in one spot���along, of course, with endless cat videos and slick dance moves.
Battery for the car key fob gone dead? YouTube plus $5 for the battery beats $20 at the dealer. Repairing a gate latch becomes a choice between installing an $18 latch delivered by Amazon or paying $100 for a guy to come out. Same thing with a leaky showerhead. I recently called about a garage door repair. The repairman said he charged $80 just to come out, which would be over and above the cost to repair.
Perhaps best of all, there���s that feeling of accomplishment from having both mastered a new skill and saved some cash. As a retiree, I love the small challenges involved. My peers sometimes shrug about broken things and say they never learned to do repairs. But is it ever too late to start learning? A fence repair became a family activity with my sons. My daughter-in-law to be���a baker���changed the oil on her car, courtesy of YouTube tutelage. She was so excited she offered to do ours.
Strikes me as a good thing: You learn skills, exercise the mind���and save money. Or, as Ben Franklin supposedly said, ���Watch the pennies and the dollars will take care of themselves.��� But it seems he got that off the internet.
The post YouTube, You Save appeared first on HumbleDollar.
Preservation Mode
I RECENTLY LEFT MY job without having another lined up. Upon quitting, I noticed an immediate mindset shift: I went from thinking about how to grow my money to, instead, thinking about how to preserve it.
As a trained financial planner, I know that many workers will face a similar mental transition as they begin to wind down their careers. But I was surprised at how quickly it happened to me. After all, I���m only age 39, I���m fortunate to have investments and an emergency fund, and I plan to return to work soon.
Here are four questions I���m considering while I���m between jobs. You may find them helpful if you���re considering a career change, a gap year or early retirement.
1. How much money do I really need each month to support myself?
It���s natural to get used to a certain amount of income when you have a stable job���and I���ve enjoyed a steady salary for as long as I���ve been in the workforce. But now that I���m in preservation mode and considering my next steps, I���m wondering how much I actually need to support my lifestyle.
As I see it, there are two ways to answer this question. First, I can approach the question from the perspective of my previous salary. If I assume I spent every dollar of my previous salary except for my documented savings, I can get at that number pretty easily. I just take my old salary and subtract my 401(k) contributions.
This gives me the amount I need to earn to sustain my lifestyle in a new job. For example, take someone who makes $50,000 a year, saves 10% in a 401(k) and socks away another $50 a month in an emergency fund. That person wouldn���t need to replace $50,000 to keep up the same lifestyle, but just $44,400.
The second way to answer the ���how much do I need��� question is from an expense perspective. Here I would tally up my fixed costs (mortgage, utility bills and so on) and variable costs (entertainment, travel). Then I would gross those numbers up for taxes. If my pre-tax fixed expenses are $1,500 a month, and my variable expenses are another $1,000, I know I need $18,000 a year to cover the former, and $12,000 to cover the latter.
If I���m going to pull that money from a portfolio, I���d need to figure in federal and state income taxes. If those came to 15%, I���d have to pull some $35,294 out of my portfolio to have $30,000 to spend. If I���m going to earn that money through employment, I���ll also need to account for not just income taxes, but also 7.65% in Social Security and Medicare deductions. That means I���d need to earn $38,785 to net me $30,000.
2. To hold me over, can I restructure my portfolio to provide income?
My entire investing career has been oriented toward growth. But I now face an income shortage. Even after I find new work, there���s no guarantee I���ll make the same amount that I did previously. I���m considering whether it makes sense to divert some of my portfolio into income-producing assets. This is a question that many pre-retirees face, so it���s interesting for me to see it up close.
It doesn���t help that interest rates are so low at the moment. My online savings account pays 0.5% a year, which won���t get me very far. Certificates of deposit aren���t offering much more. There are always bonds and dividend stocks to consider.
My friend Ashby Daniels advocates a dividend stock strategy in his easy-to-read book, Creating a Retirement Income Plan Simplified. Investing more in stocks���even dividend-paying stocks���would move me further out on the risk spectrum, and there���s a chance of getting burned. But the idea of scooping up dividends to provide income intrigues me nonetheless.
3. If I sell assets in my portfolio for living expenses, which assets should I sell first?
I have enough savings to hold me over for a while, and this break from work should be short-lived. But you can never be sure what the future holds. What if I enjoy this newfound independence and decide I want to extend it? What if I decide to build my own business? What if I take a lower-paying job?
In all of those scenarios, my cash savings could eventually run out, forcing me to tap into my investment portfolio. Again, this is a question that many retirees face. Do I know which assets to sell and the order in which to sell them? Do I know the tax implications of selling if I need to? From a tax perspective, I���m well diversified across taxable, Roth and traditional retirement accounts. Should I sell taxable investments first? Or consider tapping my Roth contributions?
4. What part-time and ���gig��� work is available?
I���m only a few weeks into my ���funemployment,��� and I���m already starting to get antsy. But I���m enjoying the ability to wake up naturally, enjoy a slow cup of coffee in the morning, and take the dog for a walk without having to worry about getting back to my desk.
Rather than return to fulltime work, could I cobble together enough part-time jobs to keep me afloat for a while? If I have an accurate idea of how much income I need each month, I���ll have a starting point as I weigh that possibility.
Matt Trogdon is a financial advisor in Washington, DC, with a special interest in helping Gen X and Gen Y families.��He also serves as a workshop instructor for the Babson College Financial Literacy Project. Matt's previous article was What It Really Costs. Follow him on Twitter��@Matt_Trogdon.
As a trained financial planner, I know that many workers will face a similar mental transition as they begin to wind down their careers. But I was surprised at how quickly it happened to me. After all, I���m only age 39, I���m fortunate to have investments and an emergency fund, and I plan to return to work soon.
Here are four questions I���m considering while I���m between jobs. You may find them helpful if you���re considering a career change, a gap year or early retirement.
1. How much money do I really need each month to support myself?
It���s natural to get used to a certain amount of income when you have a stable job���and I���ve enjoyed a steady salary for as long as I���ve been in the workforce. But now that I���m in preservation mode and considering my next steps, I���m wondering how much I actually need to support my lifestyle.
As I see it, there are two ways to answer this question. First, I can approach the question from the perspective of my previous salary. If I assume I spent every dollar of my previous salary except for my documented savings, I can get at that number pretty easily. I just take my old salary and subtract my 401(k) contributions.
This gives me the amount I need to earn to sustain my lifestyle in a new job. For example, take someone who makes $50,000 a year, saves 10% in a 401(k) and socks away another $50 a month in an emergency fund. That person wouldn���t need to replace $50,000 to keep up the same lifestyle, but just $44,400.
The second way to answer the ���how much do I need��� question is from an expense perspective. Here I would tally up my fixed costs (mortgage, utility bills and so on) and variable costs (entertainment, travel). Then I would gross those numbers up for taxes. If my pre-tax fixed expenses are $1,500 a month, and my variable expenses are another $1,000, I know I need $18,000 a year to cover the former, and $12,000 to cover the latter.
If I���m going to pull that money from a portfolio, I���d need to figure in federal and state income taxes. If those came to 15%, I���d have to pull some $35,294 out of my portfolio to have $30,000 to spend. If I���m going to earn that money through employment, I���ll also need to account for not just income taxes, but also 7.65% in Social Security and Medicare deductions. That means I���d need to earn $38,785 to net me $30,000.
2. To hold me over, can I restructure my portfolio to provide income?
My entire investing career has been oriented toward growth. But I now face an income shortage. Even after I find new work, there���s no guarantee I���ll make the same amount that I did previously. I���m considering whether it makes sense to divert some of my portfolio into income-producing assets. This is a question that many pre-retirees face, so it���s interesting for me to see it up close.
It doesn���t help that interest rates are so low at the moment. My online savings account pays 0.5% a year, which won���t get me very far. Certificates of deposit aren���t offering much more. There are always bonds and dividend stocks to consider.
My friend Ashby Daniels advocates a dividend stock strategy in his easy-to-read book, Creating a Retirement Income Plan Simplified. Investing more in stocks���even dividend-paying stocks���would move me further out on the risk spectrum, and there���s a chance of getting burned. But the idea of scooping up dividends to provide income intrigues me nonetheless.
3. If I sell assets in my portfolio for living expenses, which assets should I sell first?
I have enough savings to hold me over for a while, and this break from work should be short-lived. But you can never be sure what the future holds. What if I enjoy this newfound independence and decide I want to extend it? What if I decide to build my own business? What if I take a lower-paying job?
In all of those scenarios, my cash savings could eventually run out, forcing me to tap into my investment portfolio. Again, this is a question that many retirees face. Do I know which assets to sell and the order in which to sell them? Do I know the tax implications of selling if I need to? From a tax perspective, I���m well diversified across taxable, Roth and traditional retirement accounts. Should I sell taxable investments first? Or consider tapping my Roth contributions?
4. What part-time and ���gig��� work is available?
I���m only a few weeks into my ���funemployment,��� and I���m already starting to get antsy. But I���m enjoying the ability to wake up naturally, enjoy a slow cup of coffee in the morning, and take the dog for a walk without having to worry about getting back to my desk.
Rather than return to fulltime work, could I cobble together enough part-time jobs to keep me afloat for a while? If I have an accurate idea of how much income I need each month, I���ll have a starting point as I weigh that possibility.
Matt Trogdon is a financial advisor in Washington, DC, with a special interest in helping Gen X and Gen Y families.��He also serves as a workshop instructor for the Babson College Financial Literacy Project. Matt's previous article was What It Really Costs. Follow him on Twitter��@Matt_Trogdon.The post Preservation Mode appeared first on HumbleDollar.
November 3, 2021
Wrecked by Tech
NOTHING IN INVESTING better exemplifies what the late Donald Rumsfeld called a known unknown than the concept of intrinsic value. The relationship between a company���s current share price and its actual value over its lifetime has always been tenuous���but perhaps never more so.
Before the rise of modern technology, courtesy of Silicon Valley, intrinsic value was difficult to adjudge in a reliable way. Now, ascertaining intrinsic value has become nearly impossible���because "software is��eating the world." Technology is engaged in the capitalist equivalent of the French Revolution, summarily beheading companies. (But hey, at least my BlackBerry makes an excellent paperweight.)
Companies leverage software and artificial intelligence to disrupt legacy business models at a dizzying pace. They operate at massive losses while investors hope their stock prices will one day justify current valuations.
Amid the ongoing disruption caused by competitors, it���s impossible to know whether a company���s growth has entered a terminal decline until several quarters or years have passed. This known unknown inevitably generates massive disparities between a company���s current stock price and the underlying business���s intrinsic value���during both the growth and decline phases of that business���s lifecycle.
Technology has the potential to reduce inefficiencies and boost returns on invested capital. Those who pick the winners will continue to be richly rewarded. But if history is any guide, most investors won���t pick winners.
That���s why using an index fund to capture the intrinsic value of all companies and industries strikes me as more appealing than ever. That way, you can be sure of capturing the returns of the business world���s successful revolutionaries, while avoiding the risk that you���ll bet too much on a future Robespierre.
Before the rise of modern technology, courtesy of Silicon Valley, intrinsic value was difficult to adjudge in a reliable way. Now, ascertaining intrinsic value has become nearly impossible���because "software is��eating the world." Technology is engaged in the capitalist equivalent of the French Revolution, summarily beheading companies. (But hey, at least my BlackBerry makes an excellent paperweight.)
Companies leverage software and artificial intelligence to disrupt legacy business models at a dizzying pace. They operate at massive losses while investors hope their stock prices will one day justify current valuations.
Amid the ongoing disruption caused by competitors, it���s impossible to know whether a company���s growth has entered a terminal decline until several quarters or years have passed. This known unknown inevitably generates massive disparities between a company���s current stock price and the underlying business���s intrinsic value���during both the growth and decline phases of that business���s lifecycle.
Technology has the potential to reduce inefficiencies and boost returns on invested capital. Those who pick the winners will continue to be richly rewarded. But if history is any guide, most investors won���t pick winners.
That���s why using an index fund to capture the intrinsic value of all companies and industries strikes me as more appealing than ever. That way, you can be sure of capturing the returns of the business world���s successful revolutionaries, while avoiding the risk that you���ll bet too much on a future Robespierre.
The post Wrecked by Tech appeared first on HumbleDollar.
