Jonathan Clements's Blog, page 260
October 20, 2021
A Diminished Voice
IN 1994, AMERICANS could find out what was going on in their communities by reading one of the 1,534 daily U.S. newspapers. Most of them were published in individual cities and towns where they served subscribers defined by geography, rather than by political persuasion or socio-economic class.
These newspapers were trusted voices. They provided common knowledge and community forums for everyone from bank presidents and doctors to plumbers and teachers.
As of 2018, 255 daily newspapers had stopped publishing, and the survivors have lost large numbers of readers. Instead, millions of Americans now depend on social media, notably Facebook, where forums and groups defined by interests proliferate and where news is reposted from dubious sources. Along the way, we���ve lost a common thread in our public discourse.
I was the editor of one of the 1,534 daily newspapers that existed in 1994. I always aimed to uphold the standards of journalism: accuracy, fairness and balance. They seem like quaint virtues today. So many people seek only to confirm their beliefs and never to be challenged.
Although many of the newspapers were owned by chains and needed to make profits, each had a degree of independence. Most sought to serve their communities as best they could.
Now, a whistleblower has confirmed that Facebook has put profits above all other considerations. Facebook co-founder Mark Zuckerberg controls some 58% of the company���s voting stock. It boggles the mind to think that one individual can make final decisions that affect almost three billion monthly active users. One person controlling a massive communications network can���t be a good thing in the long run.
Who knows how much more successful the COVID-19 vaccine campaign would have been if we still had trusted local papers that reported facts and provided guidance? The digital age has brought many benefits. But it���s greatly diminished an institution that had once been an integral part of our communities.
These newspapers were trusted voices. They provided common knowledge and community forums for everyone from bank presidents and doctors to plumbers and teachers.
As of 2018, 255 daily newspapers had stopped publishing, and the survivors have lost large numbers of readers. Instead, millions of Americans now depend on social media, notably Facebook, where forums and groups defined by interests proliferate and where news is reposted from dubious sources. Along the way, we���ve lost a common thread in our public discourse.
I was the editor of one of the 1,534 daily newspapers that existed in 1994. I always aimed to uphold the standards of journalism: accuracy, fairness and balance. They seem like quaint virtues today. So many people seek only to confirm their beliefs and never to be challenged.
Although many of the newspapers were owned by chains and needed to make profits, each had a degree of independence. Most sought to serve their communities as best they could.
Now, a whistleblower has confirmed that Facebook has put profits above all other considerations. Facebook co-founder Mark Zuckerberg controls some 58% of the company���s voting stock. It boggles the mind to think that one individual can make final decisions that affect almost three billion monthly active users. One person controlling a massive communications network can���t be a good thing in the long run.
Who knows how much more successful the COVID-19 vaccine campaign would have been if we still had trusted local papers that reported facts and provided guidance? The digital age has brought many benefits. But it���s greatly diminished an institution that had once been an integral part of our communities.
The post A Diminished Voice appeared first on HumbleDollar.
Coming Out Ahead
LAST WEEK���S NEWS that Social Security recipients will receive a 5.9% cost-of-living adjustment for 2022 might seem like a nonevent. After all, those larger monthly checks will be fully devoured by today���s higher prices.
Or maybe not.
September���s report for the Consumer Price Index (CPI) showed that inflation for medical care services���a big cost for retirees���was quite tame over the past 12 months, rising less than 1%. Seniors also spend significantly less on transportation, so they���re less harmed by the past year���s 15% surge in the cost of new and used cars and trucks, as well as motor vehicle parts.
On the downside, younger retirees���or, at least, those willing to travel during the pandemic���have likely felt the brunt of the 18% jump in the cost of ���lodging away from home.��� One plus for travelers: A strong U.S. dollar has made overseas excursions less pricey. Those in their 60s usually travel more, while those ages 75 and up tend to spend a higher amount on health care.
Next year may be kinder to all consumers. According to Bank of America analysts, core CPI���which excludes volatile food and energy items���will rise 4.3% in 2021 and 3.1% in 2022. The Federal Reserve, which looks at a somewhat different inflation measure, expects core inflation to be even lower.
What does all this mean? Arguably, those receiving Social Security checks are getting a pretty good deal. They���re receiving a 5.9% raise, while their cost of living appears to be climbing at a slower rate.
Or maybe not.
September���s report for the Consumer Price Index (CPI) showed that inflation for medical care services���a big cost for retirees���was quite tame over the past 12 months, rising less than 1%. Seniors also spend significantly less on transportation, so they���re less harmed by the past year���s 15% surge in the cost of new and used cars and trucks, as well as motor vehicle parts.
On the downside, younger retirees���or, at least, those willing to travel during the pandemic���have likely felt the brunt of the 18% jump in the cost of ���lodging away from home.��� One plus for travelers: A strong U.S. dollar has made overseas excursions less pricey. Those in their 60s usually travel more, while those ages 75 and up tend to spend a higher amount on health care.
Next year may be kinder to all consumers. According to Bank of America analysts, core CPI���which excludes volatile food and energy items���will rise 4.3% in 2021 and 3.1% in 2022. The Federal Reserve, which looks at a somewhat different inflation measure, expects core inflation to be even lower.
What does all this mean? Arguably, those receiving Social Security checks are getting a pretty good deal. They���re receiving a 5.9% raise, while their cost of living appears to be climbing at a slower rate.
The post Coming Out Ahead appeared first on HumbleDollar.
My Mentor
FOURTEEN YEARS AGO, my father-in-law was diagnosed with a blood cancer���multiple myeloma���and given five years to live. Ever since, he���s been battling it like a warrior. But he���s dying now, and he won���t be around much longer.
My father-in-law grew up without money to Depression-era parents. He earned his way into a prestigious college, and eventually received a PhD in chemical engineering. He had an impressive career as an engineer with a large chemical company in the Midwest. He was an internationally recognized expert in his field.
Like most engineers, he was a tinkerer. He liked to figure out how things worked. As a do-it-yourself investor, he did well in the stock markets of the 1970s, ���80s and ���90s. He retired early, with a paid-off house and a handsome nest egg. And that was after putting two kids through college, including my future wife.
As for me, I was born to be wealthy. But by some galactic mistake, my family had little money, but���thankfully���a strong work ethic. I went to college by borrowing the full amount for tuition, room and board. After graduating, I had little desire to repay my loans. I also discovered that all the good political scientist jobs had already been taken. I decided the only sensible thing to do was to go to law school���and borrow twice as much for that degree.
I knew very little about money when I landed my first job as a lawyer. My impression of finance was that it was a complicated subject best left to the experts. I never dreamed of becoming a do-it-yourself investor.
I started investing in my firm���s 401(k) plan at age 27. That happened to be when the market peaked just before the Great Recession. Two years later, the market had bottomed out. By then I had moved to another firm, and was investing modest sums in that firm���s 401(k).
I���m sure I���d heard of a Roth IRA, but had no actual idea what it was, let alone how or why to invest in one. In 2009, just as the financial world was reeling from the market crash, my father-in-law suggested that I roll my old 401(k) into a Roth IRA. That way, I���d pay the conversion tax bill while in a low bracket, because I was still early in my career.
He encouraged me to open an account at Vanguard Group and invest in its Small-Cap Index Fund (symbol: VSMAX). Little did I know that my adventure in personal finance had just begun.
On visits to the in-laws��� house, the reading material consisted of The Wall Street Journal, especially the weekend editions. Discussions often turned to personal finance, including investing ideas and themes. As with most things, when you become interested in a topic, you end up learning a lot.
Reading the Journal led me to online articles. Which led to books and blogs on finance, and eventually hours per week of podcasts. Soon enough, I was reading John Bogle and Burton Malkiel. I formed the belief that, generally speaking, broad market index funds were the way to go.
My father-in-law, always the tinkerer and maverick, had more of a flair for actively managed funds. He���d certainly earned the right to select his own investments. You can���t argue with success. Over the years, we���d trade articles and ideas. He���d quietly cheer on my wife and me as we hit milestones in our own financial journey.
Looking back, I���m surprised at how far I���ve come in my knowledge of personal finance. It���s not a very difficult topic to learn. Yet many people find it daunting, and I was one of them. I was fortunate to have encouragement from a mentor, one who had made his own way in the world. He approached every topic as one that, with enough effort, he could master.
I certainly learned a lot from my father-in-law over the years, but I���ll always think of personal finance as the one thing we really bonded over. I don���t think I���d ever have learned to love it without his influence.
After someone is gone, it���s nice to share with others what that person meant to you. But it���s even better to do so while he or she is still alive.
I hope they have The Wall Street Journal in Heaven. If they do, please save the weekend business section for me for when I get there.
Licensed in both Ohio and Kentucky, Ben Rodriguez practices real estate law in Cincinnati, where he lives with his wife and daughters.��Since 2009, Ben's made a hobby out of personal finance by reading books and articles on the subject, and also listening to podcasts. Check out his earlier articles.
My father-in-law grew up without money to Depression-era parents. He earned his way into a prestigious college, and eventually received a PhD in chemical engineering. He had an impressive career as an engineer with a large chemical company in the Midwest. He was an internationally recognized expert in his field.
Like most engineers, he was a tinkerer. He liked to figure out how things worked. As a do-it-yourself investor, he did well in the stock markets of the 1970s, ���80s and ���90s. He retired early, with a paid-off house and a handsome nest egg. And that was after putting two kids through college, including my future wife.
As for me, I was born to be wealthy. But by some galactic mistake, my family had little money, but���thankfully���a strong work ethic. I went to college by borrowing the full amount for tuition, room and board. After graduating, I had little desire to repay my loans. I also discovered that all the good political scientist jobs had already been taken. I decided the only sensible thing to do was to go to law school���and borrow twice as much for that degree.
I knew very little about money when I landed my first job as a lawyer. My impression of finance was that it was a complicated subject best left to the experts. I never dreamed of becoming a do-it-yourself investor.
I started investing in my firm���s 401(k) plan at age 27. That happened to be when the market peaked just before the Great Recession. Two years later, the market had bottomed out. By then I had moved to another firm, and was investing modest sums in that firm���s 401(k).
I���m sure I���d heard of a Roth IRA, but had no actual idea what it was, let alone how or why to invest in one. In 2009, just as the financial world was reeling from the market crash, my father-in-law suggested that I roll my old 401(k) into a Roth IRA. That way, I���d pay the conversion tax bill while in a low bracket, because I was still early in my career.
He encouraged me to open an account at Vanguard Group and invest in its Small-Cap Index Fund (symbol: VSMAX). Little did I know that my adventure in personal finance had just begun.
On visits to the in-laws��� house, the reading material consisted of The Wall Street Journal, especially the weekend editions. Discussions often turned to personal finance, including investing ideas and themes. As with most things, when you become interested in a topic, you end up learning a lot.
Reading the Journal led me to online articles. Which led to books and blogs on finance, and eventually hours per week of podcasts. Soon enough, I was reading John Bogle and Burton Malkiel. I formed the belief that, generally speaking, broad market index funds were the way to go.
My father-in-law, always the tinkerer and maverick, had more of a flair for actively managed funds. He���d certainly earned the right to select his own investments. You can���t argue with success. Over the years, we���d trade articles and ideas. He���d quietly cheer on my wife and me as we hit milestones in our own financial journey.
Looking back, I���m surprised at how far I���ve come in my knowledge of personal finance. It���s not a very difficult topic to learn. Yet many people find it daunting, and I was one of them. I was fortunate to have encouragement from a mentor, one who had made his own way in the world. He approached every topic as one that, with enough effort, he could master.
I certainly learned a lot from my father-in-law over the years, but I���ll always think of personal finance as the one thing we really bonded over. I don���t think I���d ever have learned to love it without his influence.
After someone is gone, it���s nice to share with others what that person meant to you. But it���s even better to do so while he or she is still alive.
I hope they have The Wall Street Journal in Heaven. If they do, please save the weekend business section for me for when I get there.
Licensed in both Ohio and Kentucky, Ben Rodriguez practices real estate law in Cincinnati, where he lives with his wife and daughters.��Since 2009, Ben's made a hobby out of personal finance by reading books and articles on the subject, and also listening to podcasts. Check out his earlier articles.The post My Mentor appeared first on HumbleDollar.
September 30, 2021
Roth While You Can
NEWS OF ENTREPRENEUR Peter Thiel���s $5 billion Roth account, which was funded with PayPal stock, has motivated Congress to look at restricting the growth and size of Roth accounts.
There���s talk of limiting Roth account balances to $5 million or $10 million. There are also proposals to limit both backdoor IRA conversions and so-called mega-backdoor conversions. The latter involves funding a nondeductible 401(k) and then immediately converting the money to a Roth. There���s even discussion of not allowing high-income workers to convert traditional IRAs to Roth accounts.
In recent years, Congress has nixed Social Security���s file-and-suspend option and compelled beneficiaries to empty inherited IRAs within 10 years, rather than over their lifetime. But both changes were grandfathered, meaning those already using the file-and-suspend strategy and those who already had inherited IRAs weren���t affected. Presumably, it would be a similar situation with existing Roth accounts. The upshot: If Congress limits the ability to take advantage of Roth accounts in future, it makes even more sense to convert to a Roth today, while the door is still open.
There���s talk of limiting Roth account balances to $5 million or $10 million. There are also proposals to limit both backdoor IRA conversions and so-called mega-backdoor conversions. The latter involves funding a nondeductible 401(k) and then immediately converting the money to a Roth. There���s even discussion of not allowing high-income workers to convert traditional IRAs to Roth accounts.
In recent years, Congress has nixed Social Security���s file-and-suspend option and compelled beneficiaries to empty inherited IRAs within 10 years, rather than over their lifetime. But both changes were grandfathered, meaning those already using the file-and-suspend strategy and those who already had inherited IRAs weren���t affected. Presumably, it would be a similar situation with existing Roth accounts. The upshot: If Congress limits the ability to take advantage of Roth accounts in future, it makes even more sense to convert to a Roth today, while the door is still open.
The post Roth While You Can appeared first on HumbleDollar.
Help Helping Others
AMERICANS ARE a generous people. They gave $471 billion to charity in 2020, according to Giving USA. Of that sum, 69% was contributed by individuals like you and me, as opposed to foundations or corporations, plus another 9% took the form of bequests.
Are you charitably inclined? Donor-advised funds can offer a tax-efficient way to make financial gifts, allowing folks to fund their own giving foundation and then direct money to charities for years to come.
A donor-advised fund can be established at any number of institutions, including community foundations, mutual fund companies, brokerage firms and universities. And you don���t need to be a Rockefeller to get started. Initial minimum contributions vary but can be as little as $1.
When you set up a donor-advised fund, you get to name it. Many donors name them after their own family, just like those big foundations that sponsor NPR programs. You also determine how the money you give will be managed. In exchange, fund providers will charge fees, which can include administrative and investment expenses. They���ll also disburse the gifts. Legally, they control the money you���ve given them. But as the name ���donor advised��� implies, the gifts are almost always made to a charity you care about and in the amounts you recommend.
To get started, you do have to give something away. You can fund the account with an irrevocable contribution of personal assets, which can include cash, stock, real estate and more. You usually receive the maximum tax deduction allowed by the IRS in the year the donation is made. The fund itself, however, can endure for many years. In the meantime, your contribution can be invested and grow tax-free. Gifts are typically made when you suggest, though many providers mandate some minimum level of giving, such as $50 every three years.
Here are three reasons to consider using a donor-advised fund for your charitable giving:
1. Tax minimization. Recent tax law changes raised the standard deduction, so it's $12,550 for single filers and $25,100 for married filers in 2021. To rise above the standard deduction and thereby receive some tax benefit from their charitable gift, taxpayers can bunch several years of donations into one by endowing a donor-advised fund.
For example, a married couple may be planning to give $15,000 a year to a broad array of charities. Generous as they are, that amount is too small to earn them any tax benefit because it���s beneath the standard deduction. Let���s say they have the resources to bunch two years of giving into one, and give $30,000 to a donor-advised fund. They realize a $30,000 tax deduction in that year���and the money can still be given over a two-year timespan.
2. Tax avoidance. A donor-advised fund can be used to avoid certain taxes altogether. Say you have stocks with significant unrealized capital gains. You also have gifting plans that could be satisfied over the next few years with these stocks. You might contribute these appreciated stocks to a donor-advised fund. That way, you���d enjoy the tax deduction immediately, avoid capital gains taxes on the sale and fund the charitable gifts you planned.
3. Estate planning. A donor-advised fund can help lower legal costs and reduce the complexity of estate planning. Instead of listing each charity in your legal documents, you can identify your donor-advised fund as the recipient of any charitable donation. You would then leave instructions with your donor fund on how the money should be given away. If you suddenly decide to add a bird sanctuary to your giving plans, you need only update your fund instructions, not your estate planning paperwork.
Phil Kernen, CFA, is a portfolio manager and partner with
Mitchell Capital
, a financial planning and investment management firm in Leawood, Kansas. When he's not working, Phil enjoys spending time with his family and friends, reading, hiking and riding his bike. You can connect with Phil via
LinkedIn
. Check out his earlier articles.
Are you charitably inclined? Donor-advised funds can offer a tax-efficient way to make financial gifts, allowing folks to fund their own giving foundation and then direct money to charities for years to come.
A donor-advised fund can be established at any number of institutions, including community foundations, mutual fund companies, brokerage firms and universities. And you don���t need to be a Rockefeller to get started. Initial minimum contributions vary but can be as little as $1.
When you set up a donor-advised fund, you get to name it. Many donors name them after their own family, just like those big foundations that sponsor NPR programs. You also determine how the money you give will be managed. In exchange, fund providers will charge fees, which can include administrative and investment expenses. They���ll also disburse the gifts. Legally, they control the money you���ve given them. But as the name ���donor advised��� implies, the gifts are almost always made to a charity you care about and in the amounts you recommend.
To get started, you do have to give something away. You can fund the account with an irrevocable contribution of personal assets, which can include cash, stock, real estate and more. You usually receive the maximum tax deduction allowed by the IRS in the year the donation is made. The fund itself, however, can endure for many years. In the meantime, your contribution can be invested and grow tax-free. Gifts are typically made when you suggest, though many providers mandate some minimum level of giving, such as $50 every three years.
Here are three reasons to consider using a donor-advised fund for your charitable giving:
1. Tax minimization. Recent tax law changes raised the standard deduction, so it's $12,550 for single filers and $25,100 for married filers in 2021. To rise above the standard deduction and thereby receive some tax benefit from their charitable gift, taxpayers can bunch several years of donations into one by endowing a donor-advised fund.
For example, a married couple may be planning to give $15,000 a year to a broad array of charities. Generous as they are, that amount is too small to earn them any tax benefit because it���s beneath the standard deduction. Let���s say they have the resources to bunch two years of giving into one, and give $30,000 to a donor-advised fund. They realize a $30,000 tax deduction in that year���and the money can still be given over a two-year timespan.
2. Tax avoidance. A donor-advised fund can be used to avoid certain taxes altogether. Say you have stocks with significant unrealized capital gains. You also have gifting plans that could be satisfied over the next few years with these stocks. You might contribute these appreciated stocks to a donor-advised fund. That way, you���d enjoy the tax deduction immediately, avoid capital gains taxes on the sale and fund the charitable gifts you planned.
3. Estate planning. A donor-advised fund can help lower legal costs and reduce the complexity of estate planning. Instead of listing each charity in your legal documents, you can identify your donor-advised fund as the recipient of any charitable donation. You would then leave instructions with your donor fund on how the money should be given away. If you suddenly decide to add a bird sanctuary to your giving plans, you need only update your fund instructions, not your estate planning paperwork.
Phil Kernen, CFA, is a portfolio manager and partner with
Mitchell Capital
, a financial planning and investment management firm in Leawood, Kansas. When he's not working, Phil enjoys spending time with his family and friends, reading, hiking and riding his bike. You can connect with Phil via
LinkedIn
. Check out his earlier articles.The post Help Helping Others appeared first on HumbleDollar.
September 29, 2021
Eating Our Feelings
PANDEMICS MAKE US��hungry and thirsty, or so say the monthly spending data from the Commerce Department's Bureau of Economic Analysis.
In March 2020, as the pandemic hit with full fury, our collective spending on groceries jumped 23% from a month earlier. We can chalk that up to hoarding. Since then, monthly spending on groceries has never matched March 2020. Still, it also hasn't fallen back to pre-pandemic levels, no doubt partly because of food price increases. Still, the numbers suggest that preparing meals at home has become more popular.
What about wine, beer and spirits for home consumption? Similar to groceries, spending on booze soared 19% in March 2020 from a month earlier and it, too, has been at elevated levels ever since. In fact, over the past 16 months, there have been six months when spending was above that of March 2020. Zoom cocktails, anyone?
But not every spending category has been booming. In April 2020, the dollars lavished on things like gyms, live entertainment, sports events, amusement parks and movies was 85% below January 2020. Even today, we're at barely half the pre-pandemic level. Similarly, in April 2020, spending on gambling was 77% below three months earlier. But in this case, we've seen a full recovery, with monthly spending now above January 2020.
What about other discretionary spending? Monthly spending on restaurant meals���as well as alcohol when eating out���is also above January 2020, while hotel and motel spending has almost fully recovered. But spending on foreign travel is at just half the pre-pandemic level, while air travel generally remains 25% below January 2020. What about getting our hair cut���not something I'd usually consider "discretionary"? It seems many folks are still hacking away at their own hair. As of July 2021, the latest month for which data is available, spending at "hairdressing salons and personal grooming establishments" remained 40% below pre-pandemic levels.
In March 2020, as the pandemic hit with full fury, our collective spending on groceries jumped 23% from a month earlier. We can chalk that up to hoarding. Since then, monthly spending on groceries has never matched March 2020. Still, it also hasn't fallen back to pre-pandemic levels, no doubt partly because of food price increases. Still, the numbers suggest that preparing meals at home has become more popular.
What about wine, beer and spirits for home consumption? Similar to groceries, spending on booze soared 19% in March 2020 from a month earlier and it, too, has been at elevated levels ever since. In fact, over the past 16 months, there have been six months when spending was above that of March 2020. Zoom cocktails, anyone?
But not every spending category has been booming. In April 2020, the dollars lavished on things like gyms, live entertainment, sports events, amusement parks and movies was 85% below January 2020. Even today, we're at barely half the pre-pandemic level. Similarly, in April 2020, spending on gambling was 77% below three months earlier. But in this case, we've seen a full recovery, with monthly spending now above January 2020.
What about other discretionary spending? Monthly spending on restaurant meals���as well as alcohol when eating out���is also above January 2020, while hotel and motel spending has almost fully recovered. But spending on foreign travel is at just half the pre-pandemic level, while air travel generally remains 25% below January 2020. What about getting our hair cut���not something I'd usually consider "discretionary"? It seems many folks are still hacking away at their own hair. As of July 2021, the latest month for which data is available, spending at "hairdressing salons and personal grooming establishments" remained 40% below pre-pandemic levels.
The post Eating Our Feelings appeared first on HumbleDollar.
What’s the Price?
DRIVE TO HOSPITAL. Cut the umbilical cord. Figure out names. Open a 529.
While the primary focus upon our two babies��� births was bonding, I had another item to check off: I opened a 529 college savings��account for each one within a month of their births.
It���s paid off handsomely. Through automatic monthly contributions���plus stellar market performance over the past decade���they���ve amassed sizable balances for higher education. One child now is in high school, the other is a middle-schooler. Based on what we���ve already accumulated, I���m considering pausing future contributions to their 529s.
Why? At this point, I see two likely scenarios: We���ll either overfund our 529s���or we���ll wind up with a serious shortfall. I know that sounds confusing, but it all depends on which colleges they attend. To decide whether to continue contributing, I���ve been researching what their colleges might cost. And the answers I���ve found are confounding.
Unlike most other areas of financial planning, college presents parents like us with a staggering range of possible costs. For example, the average cost for four years of public college is now about $105,000 for in-state students. The comparable cost for a private college is $220,000, according to EducationData.org. These figures include room and board. If either child decides to attend a local community college for the first two years���a viable option in our area���the four-year cost could drop to around $65,000.
I consider myself to be well-versed in financial planning and higher education. After all, I���m a college professor. Still, the incredible disparity in average college costs leaves me surprised.
Just to make it more difficult, these figures I���m quoting are averages. Many schools��� published prices are much, much higher. The full cost for football rivals Notre Dame and the University of Southern California (USC) in 2021-22 are $58,843 and $60,446, respectively. Add in room and board, and the cost balloons to about $320,000 for four years at both colleges.
The main difference between the full cost and the average cost charged are explained by tuition discounts. According to InsideHigherEd.com, the average tuition discount rate was 48.1% for the 2020-21 school year.
I recently spoke to the vice president of admissions for a private university in the southeast. This person said that private universities provide discounts to nearly all students to improve affordability and to attract top students. The discounts usually only apply to tuition, however, so room and board are still full fare.
Naturally, I would welcome tuition discounts for my children. But discounts or not, I won���t actually know how much my kids��� colleges will cost until about six months before freshman orientation. Until then, we���re flying blind on the true cost of college.
One final wrinkle: Inflation in college costs will surely lever up our bills. Four-year college costs rose 2.2 percentage points a year above the inflation rate between 2010 and 2020, according to the College Board. If general inflation averages 3% over the next six years and college costs climb two percentage points faster, the average in-state rate for a public school would jump from $105,000 to $141,000 for four years. (I chose six years from now because that���s the midpoint of my high-schooler���s college career.) Using the same factors, the average cost of a private school would jump from $220,000 to $295,000 for four years. What about the $320,000 four-year, full-fare price for the likes of Notre Dame and USC? That could jump to a shocking $430,000.
The bottom line: The possible college cost for my oldest child ranges from $65,000 to $430,000. It���s as if I���m saving to buy a car without knowing if I���ll be driving off the lot in a Honda Civic or a Lamborghini Countach.
Given this uncertainty, I plan to act conservatively. I���ll keep contributing to both kids��� 529 accounts at our current pace. In a few years, we���ll know the cost of our oldest child���s college. If we���ve oversaved���is that even a word?���we can transfer leftover funds to our younger child���s 529 and do the confounding college scenario planning all over again.
Kyle McIntosh, CPA, MBA, is a fulltime lecturer at the California Lutheran University School of Management. He turned his career focus to teaching after 23 years working in accounting and finance roles for large corporations. Kyle lives in Southern California with his wife, two children and their overly friendly goldendoodle. Follow Kyle on Twitter @KyleGMcIntosh��and check out his earlier articles.
While the primary focus upon our two babies��� births was bonding, I had another item to check off: I opened a 529 college savings��account for each one within a month of their births.
It���s paid off handsomely. Through automatic monthly contributions���plus stellar market performance over the past decade���they���ve amassed sizable balances for higher education. One child now is in high school, the other is a middle-schooler. Based on what we���ve already accumulated, I���m considering pausing future contributions to their 529s.
Why? At this point, I see two likely scenarios: We���ll either overfund our 529s���or we���ll wind up with a serious shortfall. I know that sounds confusing, but it all depends on which colleges they attend. To decide whether to continue contributing, I���ve been researching what their colleges might cost. And the answers I���ve found are confounding.
Unlike most other areas of financial planning, college presents parents like us with a staggering range of possible costs. For example, the average cost for four years of public college is now about $105,000 for in-state students. The comparable cost for a private college is $220,000, according to EducationData.org. These figures include room and board. If either child decides to attend a local community college for the first two years���a viable option in our area���the four-year cost could drop to around $65,000.
I consider myself to be well-versed in financial planning and higher education. After all, I���m a college professor. Still, the incredible disparity in average college costs leaves me surprised.
Just to make it more difficult, these figures I���m quoting are averages. Many schools��� published prices are much, much higher. The full cost for football rivals Notre Dame and the University of Southern California (USC) in 2021-22 are $58,843 and $60,446, respectively. Add in room and board, and the cost balloons to about $320,000 for four years at both colleges.
The main difference between the full cost and the average cost charged are explained by tuition discounts. According to InsideHigherEd.com, the average tuition discount rate was 48.1% for the 2020-21 school year.
I recently spoke to the vice president of admissions for a private university in the southeast. This person said that private universities provide discounts to nearly all students to improve affordability and to attract top students. The discounts usually only apply to tuition, however, so room and board are still full fare.
Naturally, I would welcome tuition discounts for my children. But discounts or not, I won���t actually know how much my kids��� colleges will cost until about six months before freshman orientation. Until then, we���re flying blind on the true cost of college.
One final wrinkle: Inflation in college costs will surely lever up our bills. Four-year college costs rose 2.2 percentage points a year above the inflation rate between 2010 and 2020, according to the College Board. If general inflation averages 3% over the next six years and college costs climb two percentage points faster, the average in-state rate for a public school would jump from $105,000 to $141,000 for four years. (I chose six years from now because that���s the midpoint of my high-schooler���s college career.) Using the same factors, the average cost of a private school would jump from $220,000 to $295,000 for four years. What about the $320,000 four-year, full-fare price for the likes of Notre Dame and USC? That could jump to a shocking $430,000.
The bottom line: The possible college cost for my oldest child ranges from $65,000 to $430,000. It���s as if I���m saving to buy a car without knowing if I���ll be driving off the lot in a Honda Civic or a Lamborghini Countach.
Given this uncertainty, I plan to act conservatively. I���ll keep contributing to both kids��� 529 accounts at our current pace. In a few years, we���ll know the cost of our oldest child���s college. If we���ve oversaved���is that even a word?���we can transfer leftover funds to our younger child���s 529 and do the confounding college scenario planning all over again.
Kyle McIntosh, CPA, MBA, is a fulltime lecturer at the California Lutheran University School of Management. He turned his career focus to teaching after 23 years working in accounting and finance roles for large corporations. Kyle lives in Southern California with his wife, two children and their overly friendly goldendoodle. Follow Kyle on Twitter @KyleGMcIntosh��and check out his earlier articles.The post What’s the Price? appeared first on HumbleDollar.
September 28, 2021
Deflated Pensions
INFLATION IS BAD news for bond investors, but it���s really terrible for annuitants and those receiving company pensions. Bond investors can at least reinvest maturing bonds in newer bonds paying higher yields. But most income annuities and pensions pay a fixed monthly benefit for life. In fact, you can no longer even buy inflation-adjusted single-premium immediate annuities. Meanwhile, just 7% of all private-sector pensioners received automatic cost-of-living increases, according to a 2000 survey by the Bureau of Labor Statistics.
Just how big a problem would sustained inflation be for annuitants and pensioners? In recent months, inflation has averaged 6%, as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). If it remained stuck there, it would cut a pension���s purchasing power in half in just 12 years.
One pension, however, has near complete protection from the ravages of inflation. The Federal Employees Retirement System contains a cost-of-living adjustment (COLA) that raises payments annually. Here's how it works: If inflation, as measured by CPI-W, is 2% or less, the COLA matches it. If inflation runs between 2% and 3%, the COLA remains at 2%. Most important, if inflation exceeds 3%, the COLA equals the CPI-W minus one percentage point. In other words, the worst-case scenario is that the COLA lags behind inflation by one percentage point in any given year.
If inflation spirals out of control at 10% a year, the COLA would add 9% to federal pension payments annually. If a federal worker���s pension were to lag inflation by one percentage point annually���remember, this is the worst-case scenario���its purchasing power would decline 26% after three decades. That���s not too bad, considering the alternative. An annuity or pension without inflation protection would have lost 94% of its value after the same 30 years.
Federal pensions are also backed by the full faith and credit of the federal government. That���s no small thing when you compare them to state pension plans. In aggregate, statewide pension plans were only 72.9% funded in 2019, near the lowest point in modern history. Given the current headwind of ultra-low interest rates, that shortfall is unlikely to narrow.
I���m certainly not predicting sustained 10% inflation. But even 5% inflation would drive down purchasing power by 77% in 30 years for those pensioners without a COLA. Worse yet, many economists feel that the official measure of inflation significantly underreports��the true price increases we encounter in our daily lives.
Just how big a problem would sustained inflation be for annuitants and pensioners? In recent months, inflation has averaged 6%, as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). If it remained stuck there, it would cut a pension���s purchasing power in half in just 12 years.
One pension, however, has near complete protection from the ravages of inflation. The Federal Employees Retirement System contains a cost-of-living adjustment (COLA) that raises payments annually. Here's how it works: If inflation, as measured by CPI-W, is 2% or less, the COLA matches it. If inflation runs between 2% and 3%, the COLA remains at 2%. Most important, if inflation exceeds 3%, the COLA equals the CPI-W minus one percentage point. In other words, the worst-case scenario is that the COLA lags behind inflation by one percentage point in any given year.
If inflation spirals out of control at 10% a year, the COLA would add 9% to federal pension payments annually. If a federal worker���s pension were to lag inflation by one percentage point annually���remember, this is the worst-case scenario���its purchasing power would decline 26% after three decades. That���s not too bad, considering the alternative. An annuity or pension without inflation protection would have lost 94% of its value after the same 30 years.
Federal pensions are also backed by the full faith and credit of the federal government. That���s no small thing when you compare them to state pension plans. In aggregate, statewide pension plans were only 72.9% funded in 2019, near the lowest point in modern history. Given the current headwind of ultra-low interest rates, that shortfall is unlikely to narrow.
I���m certainly not predicting sustained 10% inflation. But even 5% inflation would drive down purchasing power by 77% in 30 years for those pensioners without a COLA. Worse yet, many economists feel that the official measure of inflation significantly underreports��the true price increases we encounter in our daily lives.
The post Deflated Pensions appeared first on HumbleDollar.
Simpler and Cheaper
VANGUARD GROUP today announced significant price cuts for its fleet of target-date retirement funds. Currently, investors can own a Vanguard target fund for the seemingly low cost of 0.12% to 0.15% a year, equal to $12 to $15 for every $10,000 invested. The new price tag will be just 0.08%, effective February 2022.
It might not seem like much, but the price cuts announced today will deliver an aggregate savings of $190 million to investors in 2022, says Vanguard. Price competition continues to be fierce in the investment management business. In a world of zero-dollar trading commissions and zero-cost index funds, financial firms are under intense pressure to lower expenses for investors.
Vanguard���s target funds are globally diversified portfolios built using index funds, effectively offering investors one-stop investment shopping. With the price cuts, its target-fund expenses will be on par with Charles Schwab���s target-index funds and below those of archrival Fidelity Investments.
By lowering costs, Vanguard also addresses a longstanding complaint among its cost-conscious investors. Currently, Vanguard investors can save a few ���basis points��� by purchasing a target fund���s component index funds, thereby creating their own target fund. With the fee reduction, building your own target-date fund using the component parts won���t make much cost difference. The upshot: Vanguard investors will have the option to make their financial life simpler���by swapping over to a single target-date fund.
This morning, Vanguard also announced that more 401(k) plans will have access to its institutional target funds, which have even lower costs. The new plan minimum will be $100 million, down from $250 million.
In addition, Vanguard said it was introducing a new mutual fund, the Vanguard Target Retirement Income and Growth Trust, which is geared to retirees. The new fund will have a 50% stock allocation, higher than the 30% allocation used by the existing Vanguard Target Retirement Income Fund. Perhaps that higher stock allocation reflects the challenge of making a nest egg last over a 30-year retirement, while also generating decent returns in today���s world of tiny bond yields.
Many market strategists, including those at Vanguard, expect low stock and bond market returns in the years ahead. What to do? We can make sure we keep more of whatever the markets deliver���by keeping costs to a minimum. Vanguard���s target-fund price cuts will allow everyday investors to do just that, while also radically simplifying their financial lives.
It might not seem like much, but the price cuts announced today will deliver an aggregate savings of $190 million to investors in 2022, says Vanguard. Price competition continues to be fierce in the investment management business. In a world of zero-dollar trading commissions and zero-cost index funds, financial firms are under intense pressure to lower expenses for investors.
Vanguard���s target funds are globally diversified portfolios built using index funds, effectively offering investors one-stop investment shopping. With the price cuts, its target-fund expenses will be on par with Charles Schwab���s target-index funds and below those of archrival Fidelity Investments.
By lowering costs, Vanguard also addresses a longstanding complaint among its cost-conscious investors. Currently, Vanguard investors can save a few ���basis points��� by purchasing a target fund���s component index funds, thereby creating their own target fund. With the fee reduction, building your own target-date fund using the component parts won���t make much cost difference. The upshot: Vanguard investors will have the option to make their financial life simpler���by swapping over to a single target-date fund.
This morning, Vanguard also announced that more 401(k) plans will have access to its institutional target funds, which have even lower costs. The new plan minimum will be $100 million, down from $250 million.
In addition, Vanguard said it was introducing a new mutual fund, the Vanguard Target Retirement Income and Growth Trust, which is geared to retirees. The new fund will have a 50% stock allocation, higher than the 30% allocation used by the existing Vanguard Target Retirement Income Fund. Perhaps that higher stock allocation reflects the challenge of making a nest egg last over a 30-year retirement, while also generating decent returns in today���s world of tiny bond yields.
Many market strategists, including those at Vanguard, expect low stock and bond market returns in the years ahead. What to do? We can make sure we keep more of whatever the markets deliver���by keeping costs to a minimum. Vanguard���s target-fund price cuts will allow everyday investors to do just that, while also radically simplifying their financial lives.
The post Simpler and Cheaper appeared first on HumbleDollar.
Oldies but Goodies
IF YOU���VE EVER wanted to own antique furniture, now is the time to buy. The cost of ���brown furniture��� has plummeted. That old-money mahogany is deeply out of fashion with today���s tastemakers, who prefer mid-century modern set out in spare, white rooms.
I won���t claim that 18th century goods are better aesthetically. That���s my personal preference, and probably an East Coast sensibility. Rather, I���d say that old furniture is better value. The fact that a table or desk has survived for two centuries is a testament to its durability���and it may cost less now than flat-pack furniture made of particle board.
Last summer, I spotted a Chippendale tea table with a solid mahogany top. A faded note pasted to the underside dated it to 1773. I bought it for $105 from the dealer, who said he wanted to make room for other goods. It could have been priced at five or 10 times as much a decade earlier.
Another piece we own���an English dressing table���dates to around 1750. My wife worries that her makeup jars may leave rings on its top. I tell her that use marks can be helpful��indicators of authenticity. Besides, it cost $250, so it can be put to use without fear of hurting its value.
I try to draw the line at buying antique chairs. People were tiny long ago. Their chairs can break under modern weight. But tables, desks, chests and chests of drawers all seem to function as well today as the day they were made.
It does take time to acquire a roomful of antiques because you can���t just buy a set. But the hunt for something rare is a good weekend diversion for me. I���m always trying to snag a bargain���and can easily find them these days.
One problem: Low prices make it hard for dealers to earn a living. A lot of antique shops have shut their doors. It���s partly the pandemic and partly because trade has moved to the internet. Still, when prices are too low, any market can grind to a halt.
I won���t claim that 18th century goods are better aesthetically. That���s my personal preference, and probably an East Coast sensibility. Rather, I���d say that old furniture is better value. The fact that a table or desk has survived for two centuries is a testament to its durability���and it may cost less now than flat-pack furniture made of particle board.
Last summer, I spotted a Chippendale tea table with a solid mahogany top. A faded note pasted to the underside dated it to 1773. I bought it for $105 from the dealer, who said he wanted to make room for other goods. It could have been priced at five or 10 times as much a decade earlier.
Another piece we own���an English dressing table���dates to around 1750. My wife worries that her makeup jars may leave rings on its top. I tell her that use marks can be helpful��indicators of authenticity. Besides, it cost $250, so it can be put to use without fear of hurting its value.
I try to draw the line at buying antique chairs. People were tiny long ago. Their chairs can break under modern weight. But tables, desks, chests and chests of drawers all seem to function as well today as the day they were made.
It does take time to acquire a roomful of antiques because you can���t just buy a set. But the hunt for something rare is a good weekend diversion for me. I���m always trying to snag a bargain���and can easily find them these days.
One problem: Low prices make it hard for dealers to earn a living. A lot of antique shops have shut their doors. It���s partly the pandemic and partly because trade has moved to the internet. Still, when prices are too low, any market can grind to a halt.
The post Oldies but Goodies appeared first on HumbleDollar.
