Jonathan Clements's Blog, page 262
September 24, 2021
Found Money
IT���S ESTIMATED THAT up to $3 billion of unclaimed property is recovered every year. But another $49 billion is lost and still waiting to be claimed. How much of it is yours?
Whenever I check if I���m due anything, I always come up empty. But the memories of found money keep me checking and hoping something pops up. Who can ever forget finding that surprise dollar bill in the pocket of your recently washed jeans when you were 11 years old, and the extra candy bar or two you bought?
My wife Kathleen and I have had two unexpected windfalls we���ll never forget. The first was when I was in seminary and money was tight. Our car was stolen and totaled. I was happy to take the insurance settlement. But my wife discovered a special law that allowed us to file a claim and maybe receive restitution from the man who stole our car. I told her not to waste her time. Thankfully, Kathleen didn���t listen to me and, two or three years later, we received a completely unexpected check for $8,000 paid from the criminal���s earnings. Listening to Kathleen���s ���I told you so��� multiple times was a small price to pay.
The second surprise came when we were walking the back streets of Capri. We had celebrated Kathleen���s successful second battle with cancer and my new job by taking our first vacation to Europe. During the two-week tour of Italy, we meandered away from our tour group and spotted a pile of euros on the ground. There was nobody around and no police station nearby. I ran into the closest bathroom to count our new-found treasure: 800 euros, which at the time was worth $1,250. We didn���t know what to do. We felt terrible that someone had lost all that money, but we had nobody to give it to.
We had earlier visited St. Francis Basilica. I went back the next day at 6 a.m. I prayed and meditated at Francis���s burial site, seeking guidance on what to do. The solution came quickly. A man who had undergone chemotherapy treatments with Kathleen had to cancel a trip to Italy with his wife due to financial concerns. We decided to send the couple the money anonymously when we returned home. It felt right and good.
Found money may be the best money there is, whether it���s used for candy bars, for groceries or to help someone else. Be sure to find���and maybe give away���all that you can.
The post Found Money appeared first on HumbleDollar.
You Aren’t Listening
WHEN IT COMES to communication, I���m kind of a fanatic. (My wife would say I should drop the ���kind of.���) More specifically, I���m a fan of responsive communication.
Back in my working days, when I practiced criminal law, I made it a point to return phone calls and emails from clients promptly. It was rare that I didn���t do it the same day. If that meant staying late at the office until I caught up, I stayed late.
Whenever I had a client who had had a different lawyer on a previous case, the most frequent complaints were ���I couldn���t ever talk to him��� or ���she wouldn���t return my calls or emails.��� I was always sympathetic to these gripes. It really gets my dander up if someone I���m doing business with is nonresponsive.
When it comes to dealing with our finances, responsive communication is essential. How hard is it to communicate with the financial companies you use? And what means of communication do they provide? I���ve noticed a growing trend away from email, and toward telephone and ���chat.��� I dislike this for several reasons.
First, I like email because you have a written record���the all-important paper trail. I keep every message of any significance, which is probably why my email cache is so huge.
As for ���chat,��� which every company seems to tout these days, sometimes you can request that a transcript of the chat be emailed to you. If they do (and not all will), that���s good for your records. But based on my experience, I suspect that the chat gig is reserved for the newest hires. I���ve seldom had much luck getting anything but the most basic chores accomplished by ���chatting.���
As for the phone, which companies tend to push, we all know the headaches. There���s a guaranteed initial round of aggravation as you negotiate with a robot. That���s followed by a total crapshoot when you finally manage to get a human on the line. Some phone reps are great, but more are mediocre or worse. And there���s no written record, of course. But the companies, as they are pleased to tell you, are recording the call���so they have a great record. I once heard of a fellow who���d always begin his conversation with the phone rep by announcing that ���for security and training purposes��� he was recording the call.
When I���m contemplating doing business with a new company, sometimes I���ll first try communicating with the folks there. If they make that unduly burdensome, I���ll look elsewhere.
When I first began investing on my own, I opened accounts at Charles Schwab and Vanguard Group, both of which I still use today. One of the best things about Schwab has been their topnotch customer service and responsiveness. You could actually call them up and very quickly not only get a human on the line, but an intelligent human who made it clear he or she was actually going to help. And the folks almost always did. I think that���s still pretty much the case, although the other day I needed to call them and got hit with the dreaded, ���We���re currently experiencing longer-than-normal wait times���.��� I hope that was just an aberration.
As for Vanguard, there���s a lot I love about the company, but its communication and responsiveness are often mediocre. I always have an assigned rep, but there���s rapid turnover among them. The new ones often don���t even bother introducing themselves. (By contrast, I���ve had the same Schwab rep for years and he���s very responsive.) When I actually need something done���most often because of a website glitch���the typical Vanguard response is that they���ll report it to the technology folks. Then I never hear back, and the problem is often ignored.
When you deal with a company rep, the Holy Grail is someone who asks for a little time to resolve the issue, and then not only resolves it but also later updates you. This doesn���t happen often. But when it does, what I really want to do is nominate them for an Academy Award for customer service. But instead, I usually contact their boss to make sure they get some well-deserved kudos.
Andrew Forsythe retired in 2017 after almost four decades practicing criminal law in Austin, Texas, first as a prosecutor and then as a defense attorney. His wife Rosalinda and he, along with their dogs, live outside Austin, at the edge of the Texas Hill Country. Their four kids are now grown, independent and successful. They're also blessed with four beautiful grandkids. Andrew loves dogs, and enjoys collecting pocketknives and flashlights. Check out his earlier��articles.
Back in my working days, when I practiced criminal law, I made it a point to return phone calls and emails from clients promptly. It was rare that I didn���t do it the same day. If that meant staying late at the office until I caught up, I stayed late.
Whenever I had a client who had had a different lawyer on a previous case, the most frequent complaints were ���I couldn���t ever talk to him��� or ���she wouldn���t return my calls or emails.��� I was always sympathetic to these gripes. It really gets my dander up if someone I���m doing business with is nonresponsive.
When it comes to dealing with our finances, responsive communication is essential. How hard is it to communicate with the financial companies you use? And what means of communication do they provide? I���ve noticed a growing trend away from email, and toward telephone and ���chat.��� I dislike this for several reasons.
First, I like email because you have a written record���the all-important paper trail. I keep every message of any significance, which is probably why my email cache is so huge.
As for ���chat,��� which every company seems to tout these days, sometimes you can request that a transcript of the chat be emailed to you. If they do (and not all will), that���s good for your records. But based on my experience, I suspect that the chat gig is reserved for the newest hires. I���ve seldom had much luck getting anything but the most basic chores accomplished by ���chatting.���
As for the phone, which companies tend to push, we all know the headaches. There���s a guaranteed initial round of aggravation as you negotiate with a robot. That���s followed by a total crapshoot when you finally manage to get a human on the line. Some phone reps are great, but more are mediocre or worse. And there���s no written record, of course. But the companies, as they are pleased to tell you, are recording the call���so they have a great record. I once heard of a fellow who���d always begin his conversation with the phone rep by announcing that ���for security and training purposes��� he was recording the call.
When I���m contemplating doing business with a new company, sometimes I���ll first try communicating with the folks there. If they make that unduly burdensome, I���ll look elsewhere.
When I first began investing on my own, I opened accounts at Charles Schwab and Vanguard Group, both of which I still use today. One of the best things about Schwab has been their topnotch customer service and responsiveness. You could actually call them up and very quickly not only get a human on the line, but an intelligent human who made it clear he or she was actually going to help. And the folks almost always did. I think that���s still pretty much the case, although the other day I needed to call them and got hit with the dreaded, ���We���re currently experiencing longer-than-normal wait times���.��� I hope that was just an aberration.
As for Vanguard, there���s a lot I love about the company, but its communication and responsiveness are often mediocre. I always have an assigned rep, but there���s rapid turnover among them. The new ones often don���t even bother introducing themselves. (By contrast, I���ve had the same Schwab rep for years and he���s very responsive.) When I actually need something done���most often because of a website glitch���the typical Vanguard response is that they���ll report it to the technology folks. Then I never hear back, and the problem is often ignored.
When you deal with a company rep, the Holy Grail is someone who asks for a little time to resolve the issue, and then not only resolves it but also later updates you. This doesn���t happen often. But when it does, what I really want to do is nominate them for an Academy Award for customer service. But instead, I usually contact their boss to make sure they get some well-deserved kudos.
Andrew Forsythe retired in 2017 after almost four decades practicing criminal law in Austin, Texas, first as a prosecutor and then as a defense attorney. His wife Rosalinda and he, along with their dogs, live outside Austin, at the edge of the Texas Hill Country. Their four kids are now grown, independent and successful. They're also blessed with four beautiful grandkids. Andrew loves dogs, and enjoys collecting pocketknives and flashlights. Check out his earlier��articles.The post You Aren’t Listening appeared first on HumbleDollar.
September 23, 2021
A Few Extra Bucks
MY FIRST JOB DURING high school was bagging groceries at Publix Super Markets. The starting wage was a cool $7 per hour in 2004. That was big money to me. It meant I could work the weekends and a few nights a week, and then buy music CDs on eBay. My 2005 goal was to earn enough to fund a Roth IRA at Vanguard Group.
Today���s teenagers have it better. Don���t take my word for it: The latest wage growth tracker, courtesy of the Atlanta Federal Reserve, shows hourly earnings for the age 16-to-24 group are up a whopping 9.5% from August a year ago. That���s the fastest clip since 2001.
All the chatter about raising the minimum wage to $15 an hour is perhaps having its effect on the private sector. Also contributing to higher pay is the ongoing labor shortage in the service sector. Restaurants, hotels and other manual labor businesses all need more workers.
This may be the best time to be a high school kid hungry for some extra bucks. College students are also licking their chops at an emerging perk���free tuition. Amazon and Walmart recently announced they���ll pay for frontline workers��� college costs. These are very encouraging signs.
Parents can make it even sweeter. Here���s a strategy: For every dollar your child earns, match��it with a Roth IRA contribution. By opening and funding Roth IRAs for your children, you set them up for success. You incentivize them to work hard, and also encourage them to become investors as they watch their accounts grow.
The pandemic upset many people���s plans. But I���m optimistic about Gen Z and Generation Alpha���the group that apparently comes after Gen Z. Higher pay is here, and hopefully a smaller student-debt burden is on its way.
Today���s teenagers have it better. Don���t take my word for it: The latest wage growth tracker, courtesy of the Atlanta Federal Reserve, shows hourly earnings for the age 16-to-24 group are up a whopping 9.5% from August a year ago. That���s the fastest clip since 2001.
All the chatter about raising the minimum wage to $15 an hour is perhaps having its effect on the private sector. Also contributing to higher pay is the ongoing labor shortage in the service sector. Restaurants, hotels and other manual labor businesses all need more workers.
This may be the best time to be a high school kid hungry for some extra bucks. College students are also licking their chops at an emerging perk���free tuition. Amazon and Walmart recently announced they���ll pay for frontline workers��� college costs. These are very encouraging signs.
Parents can make it even sweeter. Here���s a strategy: For every dollar your child earns, match��it with a Roth IRA contribution. By opening and funding Roth IRAs for your children, you set them up for success. You incentivize them to work hard, and also encourage them to become investors as they watch their accounts grow.
The pandemic upset many people���s plans. But I���m optimistic about Gen Z and Generation Alpha���the group that apparently comes after Gen Z. Higher pay is here, and hopefully a smaller student-debt burden is on its way.
The post A Few Extra Bucks appeared first on HumbleDollar.
On Your Way Out
IMAGINE YOU PLAN to retire next year. What can you do beforehand to gain the most later on? Here are some ideas to consider before you log off at work for the last time.
If you���re retiring mid-year, increase your 401(k) or 403(b) contributions. Raise your savings enough to make a full year���s allowable contribution in the months you have left. This may be your last chance to put away tax-deferred money. I retired mid-year, so I doubled my 403(b) deferrals. That way, I accumulated a full year���s contributions in just six months.
If you contribute to a health care spending account, don���t overfill it in the year you retire. These plans are ���use it or lose it.��� Estimate your health costs up until retirement and don���t add any more to the health spending account than that. Know the time window for submitting claims, and act promptly so you don���t lose the money you set aside.
If you have a defined benefit pension, know how much you���ll receive. The biggest advantage of a pension is that you can���t outlive it. It���s guaranteed income for life. But the payment is most likely fixed, so inflation will trim its purchasing power over time. There���s also a chance that your employer could default on its obligations. Yes, there are government protections for pensions. But they don���t make you whole if you���re owed a hefty sum���more than $5,400 a month in 2021.
If this worries you, ask if you can take your pension as a lump sum payment. Just make sure you���re up to the responsibilities. For starters, you���d want to roll over the money directly into an IRA. That way, you���d continue to defer taxes���and avoid a monster tax bill. You���d also have to manage the money, plus follow a disciplined withdrawal strategy so it lasts your whole lifetime.
When you turn age 65, you qualify for Medicare, the federal health care program for older Americans. You can sign up three months before your 65th birthday. If you���re retiring before 65, make sure you know the cost of continuing your employer���s health care coverage under COBRA. You���re usually responsible for paying the entire premium, including the part your employer paid when you were working.
COBRA coverage typically ends 18 months after retirement. If you would still be under 65 then, research the costs to buy coverage from an Affordable Care Act plan. Hint: ���Affordable��� may not be your reaction. Consider a high-deductible plan linked to a health savings account (HSA). If you can afford it, fully fund the HSA and pay your medical bills out of pocket. That will leave the HSA to grow tax-free and provide funds for medical care later on, including long-term care if needed.
While you���re still employed, set up a home equity line of credit as an emergency source of cash. Banks usually want to see W-2 income before approving a credit line, so you might be declined if you wait until you retire. Look for a bank offering a no-fee application. These credit lines typically allow withdrawals for up to 10 years, and charge variable interest tied to the prime rate.
Retirement may leave you in a lower tax bracket. To reduce the taxes paid in your final year of work, try to defer payments for unused vacation, commissions or bonuses until the following year. Also consider accelerating tax deductions into that final work year. For instance, you might move up the following year���s charitable deductions into your last work year, perhaps by donating appreciated shares or even establishing a donor-advised fund.
If you want to sell investments in your regular taxable account to reduce your exposure to stocks heading into retirement, look to harvest losses in that last year of work. What about winners? If possible, sell those in your first year of retirement, when your tax bracket will likely be lower.
After entering retirement, consider converting some money in your traditional IRAs to a Roth IRA. You���ll owe taxes on the conversion amount. But this could be a good time to bite the bullet. If you retire early���and don���t collect a pension or Social Security immediately���you may have a lower marginal tax rate early in retirement than you will later on.
Finally, as your first post-retirement project, take an inventory of all your retirement accounts and look to consolidate them. A few phone calls and a little paperwork will reduce headaches and recordkeeping chores for you and your heirs. (Some 401(k) or 403(b) accounts can be rolled into an IRA, but make sure you understand the different withdrawal rules for each type of account.) When you contact old employers, ask if you have any overlooked benefits. Who knows? You might discover a forgotten pension in your name.
Howard Rohleder, a former chief executive of a community hospital, retired early after more than 30 years in hospital administration. In retirement, he enjoys serving on several nonprofit boards, exploring walking paths with his wife Susan, and visiting their six grandchildren. A little-known fact: In May 1994, Howard was featured���along with five others���on the cover of Kiplinger���s Personal Finance for an article titled ���Secrets of My Investment Success.��� Check out his previous��articles.
If you���re retiring mid-year, increase your 401(k) or 403(b) contributions. Raise your savings enough to make a full year���s allowable contribution in the months you have left. This may be your last chance to put away tax-deferred money. I retired mid-year, so I doubled my 403(b) deferrals. That way, I accumulated a full year���s contributions in just six months.
If you contribute to a health care spending account, don���t overfill it in the year you retire. These plans are ���use it or lose it.��� Estimate your health costs up until retirement and don���t add any more to the health spending account than that. Know the time window for submitting claims, and act promptly so you don���t lose the money you set aside.
If you have a defined benefit pension, know how much you���ll receive. The biggest advantage of a pension is that you can���t outlive it. It���s guaranteed income for life. But the payment is most likely fixed, so inflation will trim its purchasing power over time. There���s also a chance that your employer could default on its obligations. Yes, there are government protections for pensions. But they don���t make you whole if you���re owed a hefty sum���more than $5,400 a month in 2021.
If this worries you, ask if you can take your pension as a lump sum payment. Just make sure you���re up to the responsibilities. For starters, you���d want to roll over the money directly into an IRA. That way, you���d continue to defer taxes���and avoid a monster tax bill. You���d also have to manage the money, plus follow a disciplined withdrawal strategy so it lasts your whole lifetime.
When you turn age 65, you qualify for Medicare, the federal health care program for older Americans. You can sign up three months before your 65th birthday. If you���re retiring before 65, make sure you know the cost of continuing your employer���s health care coverage under COBRA. You���re usually responsible for paying the entire premium, including the part your employer paid when you were working.
COBRA coverage typically ends 18 months after retirement. If you would still be under 65 then, research the costs to buy coverage from an Affordable Care Act plan. Hint: ���Affordable��� may not be your reaction. Consider a high-deductible plan linked to a health savings account (HSA). If you can afford it, fully fund the HSA and pay your medical bills out of pocket. That will leave the HSA to grow tax-free and provide funds for medical care later on, including long-term care if needed.
While you���re still employed, set up a home equity line of credit as an emergency source of cash. Banks usually want to see W-2 income before approving a credit line, so you might be declined if you wait until you retire. Look for a bank offering a no-fee application. These credit lines typically allow withdrawals for up to 10 years, and charge variable interest tied to the prime rate.
Retirement may leave you in a lower tax bracket. To reduce the taxes paid in your final year of work, try to defer payments for unused vacation, commissions or bonuses until the following year. Also consider accelerating tax deductions into that final work year. For instance, you might move up the following year���s charitable deductions into your last work year, perhaps by donating appreciated shares or even establishing a donor-advised fund.
If you want to sell investments in your regular taxable account to reduce your exposure to stocks heading into retirement, look to harvest losses in that last year of work. What about winners? If possible, sell those in your first year of retirement, when your tax bracket will likely be lower.
After entering retirement, consider converting some money in your traditional IRAs to a Roth IRA. You���ll owe taxes on the conversion amount. But this could be a good time to bite the bullet. If you retire early���and don���t collect a pension or Social Security immediately���you may have a lower marginal tax rate early in retirement than you will later on.
Finally, as your first post-retirement project, take an inventory of all your retirement accounts and look to consolidate them. A few phone calls and a little paperwork will reduce headaches and recordkeeping chores for you and your heirs. (Some 401(k) or 403(b) accounts can be rolled into an IRA, but make sure you understand the different withdrawal rules for each type of account.) When you contact old employers, ask if you have any overlooked benefits. Who knows? You might discover a forgotten pension in your name.
Howard Rohleder, a former chief executive of a community hospital, retired early after more than 30 years in hospital administration. In retirement, he enjoys serving on several nonprofit boards, exploring walking paths with his wife Susan, and visiting their six grandchildren. A little-known fact: In May 1994, Howard was featured���along with five others���on the cover of Kiplinger���s Personal Finance for an article titled ���Secrets of My Investment Success.��� Check out his previous��articles.The post On Your Way Out appeared first on HumbleDollar.
September 22, 2021
What They Remember
THERE���S A SAYING in the military: Rank has its privileges. It���s absolutely true. The trappings that accompany the highest military ranks can include aides, personal drivers and even cooks, to name just a few. The best leaders I���ve worked with knew that these trappings were ephemeral and often the result of luck, albeit mixed with hard work and ability.
Not every leader���whether they served in the military, corporate America or elsewhere���understands this. After retirement, Joe DiMaggio famously required announcers to introduce him as the ���greatest living ballplayer��� whenever he made a public appearance. I always found this sad and a little embarrassing. No one needed to be reminded that he was great. Yet, by doing so, DiMaggio seemed a little less great.
Eventually, we all hang up our cleats, pack up our office or put on that uniform for the final time. Few of us will be remembered many years after our retirement. Indeed, I pass by the pictures of dead Texas politicians every day and, despite my attempts to be a voracious consumer of history, I���ve heard of very few of them. I sincerely doubt more than a couple of people in my building think at all about the photos or who these long-dead leaders were.
Still, we have the opportunity to have a lasting impact���by being good stewards of our profession. I believe we do so by making our best effort at work and by helping others. You���ve no doubt heard the adage, ���They always remember how you made them feel.��� It isn���t clear who said it first. But the premise resonates with all of us.
The trappings of a job can easily become a trap. But the impact we have on others is what lasts long after we leave.
Not every leader���whether they served in the military, corporate America or elsewhere���understands this. After retirement, Joe DiMaggio famously required announcers to introduce him as the ���greatest living ballplayer��� whenever he made a public appearance. I always found this sad and a little embarrassing. No one needed to be reminded that he was great. Yet, by doing so, DiMaggio seemed a little less great.
Eventually, we all hang up our cleats, pack up our office or put on that uniform for the final time. Few of us will be remembered many years after our retirement. Indeed, I pass by the pictures of dead Texas politicians every day and, despite my attempts to be a voracious consumer of history, I���ve heard of very few of them. I sincerely doubt more than a couple of people in my building think at all about the photos or who these long-dead leaders were.
Still, we have the opportunity to have a lasting impact���by being good stewards of our profession. I believe we do so by making our best effort at work and by helping others. You���ve no doubt heard the adage, ���They always remember how you made them feel.��� It isn���t clear who said it first. But the premise resonates with all of us.
The trappings of a job can easily become a trap. But the impact we have on others is what lasts long after we leave.
The post What They Remember appeared first on HumbleDollar.
Moving Back Home
WHEN MY PARENTS were alive, they would ask me what I was going to do with their home when they passed away. I knew they wanted me to live there. My sister and brother-in-law had no interest in the house. They were planning to move to Tennessee to be close to their son.
I never really gave them an answer on what my plans were. They probably never understood why I wouldn���t jump at the chance to live in a bigger house with more amenities in a safer neighborhood.
The simple answer: As a retiree who was single, I thought I would be lonely living in their house. It was much larger than my condo���and the neighborhood was very quiet. I couldn���t imagine living there by myself.
Where I lived, I never felt lonely. I lived on the top floor of a multistory building overlooking a fairly busy street. You could see and hear cars whizzing by, people talking while walking their dogs, and customers chatting outside a small cafe across the street. All the noise and commotion in the neighborhood made it seem like I wasn���t alone, plus the other 41 neighbors living in the building were only a stone���s throw away. I thought it was the perfect place to retire.
But my life changed and I moved into my parents��� home. I got married and the house no longer felt too big. Younger families started moving into the old neighborhood. I could hear the neighbor���s child practicing his piano lessons, the sounds coming from an ice cream truck, and dogs barking in the distance. The neighborhood had more life after all.
The experts are right. The three most important factors when choosing a home are indeed location, location and location.
I never really gave them an answer on what my plans were. They probably never understood why I wouldn���t jump at the chance to live in a bigger house with more amenities in a safer neighborhood.
The simple answer: As a retiree who was single, I thought I would be lonely living in their house. It was much larger than my condo���and the neighborhood was very quiet. I couldn���t imagine living there by myself.
Where I lived, I never felt lonely. I lived on the top floor of a multistory building overlooking a fairly busy street. You could see and hear cars whizzing by, people talking while walking their dogs, and customers chatting outside a small cafe across the street. All the noise and commotion in the neighborhood made it seem like I wasn���t alone, plus the other 41 neighbors living in the building were only a stone���s throw away. I thought it was the perfect place to retire.
But my life changed and I moved into my parents��� home. I got married and the house no longer felt too big. Younger families started moving into the old neighborhood. I could hear the neighbor���s child practicing his piano lessons, the sounds coming from an ice cream truck, and dogs barking in the distance. The neighborhood had more life after all.
The experts are right. The three most important factors when choosing a home are indeed location, location and location.
The post Moving Back Home appeared first on HumbleDollar.
Great Expectations
AFTER DEPARTING the U.S. stock market for the greener pastures of emerging markets, I recently hit a pocket of turbulence. Although emerging market stocks are virtually unchanged year to date, they fell as much as 12% in August compared to the recent highs reached in February. By contrast, the S&P 500 is up 17% for the year, with barely a pullback along the way.
The travails of Chinese stocks explain much of this underperformance. In August, Beijing managed to eradicate 90% of the market value of Chinese online tutoring companies trading on the New York Stock Exchange. It also expressed its displeasure with online gaming companies. And last week, Beijing announced plans to break up Ant Group���s Alipay, which weighed heavily on shares of Alibaba.
Such are the risks to investing in countries where the rule of law is applied unevenly, to put it mildly. Does this mean I���m bailing out of emerging markets?��Well��� no. Emerging market stocks trade at a discount to those in developed markets for a reason. Investors rightly demand a higher risk premium for the greater uncertainty and volatility. This leads to lower stock market valuations, all else being equal.
But therein lies a fine point that eludes many. A higher risk premium also equates to higher expected returns. In fact, the higher discount rate used to price future cash flows reflects the additional expected return. Of course, those returns are not guaranteed. If they were, there wouldn���t be any risk.
Here���s the point: Emerging market stocks today offer significantly higher expected returns than U.S. stocks, in part because they���re historically cheap but also due to their greater risk. Investors��� perception of risk���heightened by recent events���led to a repricing of stocks. That raises expected returns. As always, investors are compensated for taking on more risk, real or perceived.
The risks in emerging markets are real. That���s why diversification is paramount. This can be achieved through diversified emerging market funds, which invest in hundreds of companies located in dozens of countries. Nobody���s entire stock portfolio should be in emerging market stocks���they���re far too volatile for that. But short-term volatility is the unavoidable price investors must pay if they hope to garner higher returns. There is no free lunch.
The travails of Chinese stocks explain much of this underperformance. In August, Beijing managed to eradicate 90% of the market value of Chinese online tutoring companies trading on the New York Stock Exchange. It also expressed its displeasure with online gaming companies. And last week, Beijing announced plans to break up Ant Group���s Alipay, which weighed heavily on shares of Alibaba.
Such are the risks to investing in countries where the rule of law is applied unevenly, to put it mildly. Does this mean I���m bailing out of emerging markets?��Well��� no. Emerging market stocks trade at a discount to those in developed markets for a reason. Investors rightly demand a higher risk premium for the greater uncertainty and volatility. This leads to lower stock market valuations, all else being equal.
But therein lies a fine point that eludes many. A higher risk premium also equates to higher expected returns. In fact, the higher discount rate used to price future cash flows reflects the additional expected return. Of course, those returns are not guaranteed. If they were, there wouldn���t be any risk.
Here���s the point: Emerging market stocks today offer significantly higher expected returns than U.S. stocks, in part because they���re historically cheap but also due to their greater risk. Investors��� perception of risk���heightened by recent events���led to a repricing of stocks. That raises expected returns. As always, investors are compensated for taking on more risk, real or perceived.
The risks in emerging markets are real. That���s why diversification is paramount. This can be achieved through diversified emerging market funds, which invest in hundreds of companies located in dozens of countries. Nobody���s entire stock portfolio should be in emerging market stocks���they���re far too volatile for that. But short-term volatility is the unavoidable price investors must pay if they hope to garner higher returns. There is no free lunch.
The post Great Expectations appeared first on HumbleDollar.
Giving Twice
MY ANDROID RANG on a sunny Saturday afternoon. The screen said it was from a police station. Hesitating, I took the call. My biracial son came on.
���I���m going to jail, Mom. But I didn���t do it.���
Instant memories, almost 50 years old, of police guns pointing at my African husband���s head and mine. Wrong profile of an interracial couple. It wasn���t us. Checking IDs, they realized we weren���t the suspects sought.
With my son���s phone call, I jumped into mama bear mode, hiring expensive and effective legal counsel to fight the charges against my son. Bottom line: Case dismissed.
That incident jolted me into modifying my estate plan. I���m sharing my personal story for readers who also may want to protect and stretch an IRA inheritance for their beneficiaries. Years ago, I named my adult son as the outright beneficiary of my traditional IRA. It seemed like a good idea. But I���ve changed my mind.
Here���s why. Over many years and careers, I funded several tax-deferred retirement accounts���a traditional IRA, plus various employer plans. I lived frugally and kept adding money to these accounts until I retired at age 72. That���s when I merged them all (except a Roth IRA and an inherited IRA) into my traditional IRA. Most of my living expenses are covered by Social Security, a small pension and other investments. In retirement, I withdraw only the minimum required annually by law. I don���t ever expect to deplete my now $1.7 million traditional IRA. Indeed, it���s the largest asset I own. As it continues to grow tax-deferred, it���s becoming a taxable ticking time bomb for my son as beneficiary.
In addition, if my son suddenly inherits this large IRA, it might be like winning the lottery. He could find it hard to resist sharply increasing his spending. Poor investments could lie ahead. Indeed, under pressure from others when he inherited his late father���s retirement account, that money was soon gone. As the mother who loves him and wants the best for him, I���d prefer that he receive my IRA over time, which will also spread out the tax bite.
Another factor: My son���s career history is mixed. Good corporate positions have been interspersed with independent contractor work and unemployment. It���s my understanding that today he doesn���t have any retirement savings, partly because funds were drained for living expenses during lean years. Now age 43, he has fewer years to save for retirement.
I want to give my son part of my estate outright. But I also want to provide ongoing income in a tax-efficient manner. He agrees that he needs this protection. So does my elder law attorney.
The 2019 SECURE Act shook up the IRA distribution rules for inheritors. The law eliminates the ability to stretch IRA withdrawals over a lifetime for almost everyone except a surviving spouse and children under age 18. After I pass, my son must withdraw and pay taxes on all the money he inherits from my IRA within 10 years. This change doesn���t affect IRAs inherited before 2020.
The death of the so-called stretch IRA means my son, as beneficiary of my IRA, will see a sharp increase in his taxable income for 10 years after my death, likely during his peak earning years. Before the SECURE Act���s passage, he might have withdrawn money over his lifetime, reducing the tax bite.
To protect my son and grandson, I���m creating a tax-exempt testamentary charitable remainder unitrust (T-CRUT) to be funded with $1 million from my traditional IRA when I die. The T-CRUT will be a partial beneficiary of my IRA. No tax will be due on this transfer because the charitable trust is tax-exempt. My T-CRUT will pay 6% of the trust���s value annually to my son in quarterly payments for 20 years. If he dies prematurely, income will continue for my grandson for the remainder of the 20-year term.
Some important details: To qualify as tax-exempt, T-CRUT payout rates for your income beneficiaries must be at least 5%. Typically, you���ll want to start with an IRA worth at least $250,000. After all income payments are made to your beneficiaries, the T-CRUT must be projected to give a minimum of 10% to charity. This is actuarially determined based on the IRA���s expected remaining value. My son will pay income tax on the payments he receives each year.
Over my many years as a financial advisor, I helped several clients establish T-CRUTs, even before the new SECURE Act. I know this approach works.
After 20 years, money remaining in my T-CRUT will transfer to a national nonprofit, establishing a named endowment to benefit a cause dear to my heart���promoting racial justice. I see it as a win-win. First, my son or grandson will enjoy 20 years of income. Then, the remainder goes to the nonprofit.
Because my tax-exempt T-CRUT won���t be subject to taxation in the way an inherited IRA usually would be and because it will have 20 years to grow, my son may inherit more money overall. It���s a great way to overcome the new mandate to empty an inherited IRA in 10 years and instead create a 20-year annual income stream. Assuming my T-CRUT���s net investment return is 6.5% with a payout rate of 6% in quarterly installments, I expect the benefits shown in the table below.
For more details, go here to view a table created using Crescendo planned giving software. If you decide to go this route, be sure to discuss your plan with a knowledgeable attorney and tax expert. Intrigued? Here���s a summary of the pros and cons.
T-CRUT advantages:
Spreads income payments to heirs over more than 10 years. It could be 20 years or even over their lifetime.
No taxes paid on the remaining IRA when it���s distributed to charity.
Reduces income tax for heirs.
Provides tax-deferred growth inside the trust.
Protects IRA���s value from creditors or others who may negatively influence heirs.
Heirs may end up with more money than if the IRA was left to them outright.
If you change your mind during your lifetime, you have the flexibility to change or even scrap the T-CRUT plan.
Can generate a charitable estate-tax deduction for large estates.
Continue supporting your values after you���re gone.
T-CRUT disadvantages:
Creating a trust is more complex than an outright gift to heirs.
Needs an attorney to draft the document.
May require certain administrative expenses to create and maintain the trust.
While a T-CRUT may result in more income over a longer period to your heirs, it won���t maximize the immediate transfer of wealth. In other words, you typically need to be charitably inclined for a T-CRUT to make sense.
Not sure you want all the bother involved? As an alternative, consider a testamentary charitable gift annuity (T-CGA). Funded when you die, this gives lifetime income to your heirs after you���re gone. A T-CGA can work well even for modest sums and the income payout to beneficiaries can be reasonable, assuming the beneficiaries will be age 65 or older when the payments start. After all income payments are made, the account balance goes to the nonprofits you designated beforehand.
Kathleen M. Rehl is retired following a career in financial planning and an ���encore career��� of speaking and doing research about widows. She authored the award-winning book, Moving Forward on Your Own: A Financial Guidebook for Widows. Kathleen enjoys writing legacy poetry and stories, as well as assisting various nonprofits. Her previous articles were Final Thoughts,��Better Than Golf and Merging Money. You can learn more at www.KathleenRehl.com.
���I���m going to jail, Mom. But I didn���t do it.���
Instant memories, almost 50 years old, of police guns pointing at my African husband���s head and mine. Wrong profile of an interracial couple. It wasn���t us. Checking IDs, they realized we weren���t the suspects sought.
With my son���s phone call, I jumped into mama bear mode, hiring expensive and effective legal counsel to fight the charges against my son. Bottom line: Case dismissed.
That incident jolted me into modifying my estate plan. I���m sharing my personal story for readers who also may want to protect and stretch an IRA inheritance for their beneficiaries. Years ago, I named my adult son as the outright beneficiary of my traditional IRA. It seemed like a good idea. But I���ve changed my mind.
Here���s why. Over many years and careers, I funded several tax-deferred retirement accounts���a traditional IRA, plus various employer plans. I lived frugally and kept adding money to these accounts until I retired at age 72. That���s when I merged them all (except a Roth IRA and an inherited IRA) into my traditional IRA. Most of my living expenses are covered by Social Security, a small pension and other investments. In retirement, I withdraw only the minimum required annually by law. I don���t ever expect to deplete my now $1.7 million traditional IRA. Indeed, it���s the largest asset I own. As it continues to grow tax-deferred, it���s becoming a taxable ticking time bomb for my son as beneficiary.
In addition, if my son suddenly inherits this large IRA, it might be like winning the lottery. He could find it hard to resist sharply increasing his spending. Poor investments could lie ahead. Indeed, under pressure from others when he inherited his late father���s retirement account, that money was soon gone. As the mother who loves him and wants the best for him, I���d prefer that he receive my IRA over time, which will also spread out the tax bite.
Another factor: My son���s career history is mixed. Good corporate positions have been interspersed with independent contractor work and unemployment. It���s my understanding that today he doesn���t have any retirement savings, partly because funds were drained for living expenses during lean years. Now age 43, he has fewer years to save for retirement.
I want to give my son part of my estate outright. But I also want to provide ongoing income in a tax-efficient manner. He agrees that he needs this protection. So does my elder law attorney.
The 2019 SECURE Act shook up the IRA distribution rules for inheritors. The law eliminates the ability to stretch IRA withdrawals over a lifetime for almost everyone except a surviving spouse and children under age 18. After I pass, my son must withdraw and pay taxes on all the money he inherits from my IRA within 10 years. This change doesn���t affect IRAs inherited before 2020.
The death of the so-called stretch IRA means my son, as beneficiary of my IRA, will see a sharp increase in his taxable income for 10 years after my death, likely during his peak earning years. Before the SECURE Act���s passage, he might have withdrawn money over his lifetime, reducing the tax bite.
To protect my son and grandson, I���m creating a tax-exempt testamentary charitable remainder unitrust (T-CRUT) to be funded with $1 million from my traditional IRA when I die. The T-CRUT will be a partial beneficiary of my IRA. No tax will be due on this transfer because the charitable trust is tax-exempt. My T-CRUT will pay 6% of the trust���s value annually to my son in quarterly payments for 20 years. If he dies prematurely, income will continue for my grandson for the remainder of the 20-year term.
Some important details: To qualify as tax-exempt, T-CRUT payout rates for your income beneficiaries must be at least 5%. Typically, you���ll want to start with an IRA worth at least $250,000. After all income payments are made to your beneficiaries, the T-CRUT must be projected to give a minimum of 10% to charity. This is actuarially determined based on the IRA���s expected remaining value. My son will pay income tax on the payments he receives each year.
Over my many years as a financial advisor, I helped several clients establish T-CRUTs, even before the new SECURE Act. I know this approach works.
After 20 years, money remaining in my T-CRUT will transfer to a national nonprofit, establishing a named endowment to benefit a cause dear to my heart���promoting racial justice. I see it as a win-win. First, my son or grandson will enjoy 20 years of income. Then, the remainder goes to the nonprofit.
Because my tax-exempt T-CRUT won���t be subject to taxation in the way an inherited IRA usually would be and because it will have 20 years to grow, my son may inherit more money overall. It���s a great way to overcome the new mandate to empty an inherited IRA in 10 years and instead create a 20-year annual income stream. Assuming my T-CRUT���s net investment return is 6.5% with a payout rate of 6% in quarterly installments, I expect the benefits shown in the table below.
For more details, go here to view a table created using Crescendo planned giving software. If you decide to go this route, be sure to discuss your plan with a knowledgeable attorney and tax expert. Intrigued? Here���s a summary of the pros and cons.
T-CRUT advantages:
Spreads income payments to heirs over more than 10 years. It could be 20 years or even over their lifetime.
No taxes paid on the remaining IRA when it���s distributed to charity.
Reduces income tax for heirs.
Provides tax-deferred growth inside the trust.
Protects IRA���s value from creditors or others who may negatively influence heirs.
Heirs may end up with more money than if the IRA was left to them outright.
If you change your mind during your lifetime, you have the flexibility to change or even scrap the T-CRUT plan.
Can generate a charitable estate-tax deduction for large estates.
Continue supporting your values after you���re gone.
T-CRUT disadvantages:
Creating a trust is more complex than an outright gift to heirs.
Needs an attorney to draft the document.
May require certain administrative expenses to create and maintain the trust.
While a T-CRUT may result in more income over a longer period to your heirs, it won���t maximize the immediate transfer of wealth. In other words, you typically need to be charitably inclined for a T-CRUT to make sense.
Not sure you want all the bother involved? As an alternative, consider a testamentary charitable gift annuity (T-CGA). Funded when you die, this gives lifetime income to your heirs after you���re gone. A T-CGA can work well even for modest sums and the income payout to beneficiaries can be reasonable, assuming the beneficiaries will be age 65 or older when the payments start. After all income payments are made, the account balance goes to the nonprofits you designated beforehand.
Kathleen M. Rehl is retired following a career in financial planning and an ���encore career��� of speaking and doing research about widows. She authored the award-winning book, Moving Forward on Your Own: A Financial Guidebook for Widows. Kathleen enjoys writing legacy poetry and stories, as well as assisting various nonprofits. Her previous articles were Final Thoughts,��Better Than Golf and Merging Money. You can learn more at www.KathleenRehl.com.The post Giving Twice appeared first on HumbleDollar.
September 21, 2021
Taught by Others
THE DEEPER I SETTLE into semi-retirement, the more I miss something that I didn���t realize was important to me: working with and learning from a diverse group of people. I was lucky that, for most of my four-decade career, I was employed by profit-making and nonprofit organizations that were committed to workforce diversity.
I miss how easy it was to be challenged and changed by difference. Sometimes, it was on pop culture. Sometimes, it was on something much more important. During my career, I learned how many things I take for granted as a white male: walking alone safely at night, driving without worrying about random police stops, making more for doing the same work, and the respect I got at work even when others deserved more.
Awareness of our society���s diversity seems especially absent from the world of finance. I was reminded of this recently when I spoke to a woman of color who was in her mid-30s. She���s beginning to learn about investing and financial planning. She was, of course, confused by the financial alphabet soup that we forget is a foreign language to most.
As I explained Roths, 401(k)s, 403(b)s, ETFs, ESG, cryptocurrencies and mutual funds, I was struck once again by how hard it can be for young people and people of color to break through the cultural, gender and class biases that often come with financial advice. Not everybody grew up with parents who invested in the stock market or even had a bank account. Not everybody today has the chance to own a home or has a job with employee benefits.
As a relatively old, white, heterosexual male, it���s easy to forget that any experience, advice or wisdom I bring has been filtered through my racial, cultural and gender lenses. I often assume that even those without a college degree can climb the corporate ladder or craft their own financial plan. But in most cases, that simply isn���t true. That���s why it���s so important to regularly interact with and learn from people different from me.
During my career, one of the best things I was taught was the platinum rule. Most of us had the golden rule drilled into us from a young age: ���Do unto others as you would have them do to you.���
By contrast, the platinum rule says: ���Do unto others as they would want to be done to them.��� It���s a small but powerful distinction. To help others, I first need to understand where they���re coming from. It���s especially critical when they���re different from me. As always, platinum is more valuable than gold.
The post Taught by Others appeared first on HumbleDollar.
Fool’s Gold
I RECENTLY LEARNED that crooks like to use tungsten to defraud gold investors. Here's how it works: Gold bars are typically validated by weight. If a standard size bar clocks in at the expected weight, it's assumed to be pure. But tungsten, it turns out, has a very similar density to gold. Crooks will drill out a bar���s core, fill it with tungsten and then cover their tracks by applying a thin veneer of gold.
But there's an easy way for gold experts to detect this fraud. Ultrasound machines, not very different from those used by obstetricians, can see through metal and spot bars that have been tampered with. In that way, the opportunity to commit fraud with gold���and other precious metals���is minimized.
One of the keys to success for investors, in my opinion, is to keep things simple���or, more specifically, to avoid complexity. A recent example: Earlier this year, a fund called Infinity Q Diversified Alpha ran into trouble. According to The��Wall Street Journal, ���Infinity held wide-ranging bets across stock, currency and derivatives markets, including over-the-counter positions.���
Those complex investments allowed room for the fund���s operators to engage in misbehavior. Quoting the��Journal��again, ���Infinity appeared to have misvalued its large derivatives portfolio. Some of the valuations it disclosed were too high and, in one instance, mathematically impossible.���
Complexity, in other words, provided cover for dishonesty. That, in my view, was the root of the problem. Sure, there's the potential for things to go wrong with any investment. But when a fund consists of an impenetrable stew like this, it's that much harder to uncover malfeasance. The lesson for investors: Stick with investments that are straightforward, where a simple analysis could expose a problem. That way, you're far less likely to end up with tungsten instead of gold.
But there's an easy way for gold experts to detect this fraud. Ultrasound machines, not very different from those used by obstetricians, can see through metal and spot bars that have been tampered with. In that way, the opportunity to commit fraud with gold���and other precious metals���is minimized.
One of the keys to success for investors, in my opinion, is to keep things simple���or, more specifically, to avoid complexity. A recent example: Earlier this year, a fund called Infinity Q Diversified Alpha ran into trouble. According to The��Wall Street Journal, ���Infinity held wide-ranging bets across stock, currency and derivatives markets, including over-the-counter positions.���
Those complex investments allowed room for the fund���s operators to engage in misbehavior. Quoting the��Journal��again, ���Infinity appeared to have misvalued its large derivatives portfolio. Some of the valuations it disclosed were too high and, in one instance, mathematically impossible.���
Complexity, in other words, provided cover for dishonesty. That, in my view, was the root of the problem. Sure, there's the potential for things to go wrong with any investment. But when a fund consists of an impenetrable stew like this, it's that much harder to uncover malfeasance. The lesson for investors: Stick with investments that are straightforward, where a simple analysis could expose a problem. That way, you're far less likely to end up with tungsten instead of gold.
The post Fool’s Gold appeared first on HumbleDollar.
