Jonathan Clements's Blog, page 264
September 18, 2021
Behaving Badly
OTHERS MIGHT BE hoping to add to their wealth by picking the next hot stock. But here at HumbleDollar, we���re much more concerned about subtraction.
The goal: Keep more of whatever the financial markets deliver by minimizing investment costs and avoiding unnecessarily large tax bills. This is a reason to favor index funds. But even if we index, we need to be alert to another threat���that posed by the person in the mirror.
Two recent studies highlight the risk of self-inflicted investment wounds. ���When do investors freak out?��� asks the title of a new academic study. The paper looks at instances where a household���s stock holdings drop 90% or more in a month, of which at least 50% is due to trading.
Such ���freak outs��� tend to occur during sharp market declines, and they���re more common among those who are male, over age 45, married or have dependents. Freak outs are also more common among those who say they have excellent investment experience or knowledge.
For these investors, the big shift out of stocks tends to protect them in the short term. But they���re often too slow getting back into the stock market, so they miss out on significant gains. It���s become a clich��, but it���s worth repeating: What matters isn���t timing the market, but time in the market. The stock market���s big gains usually go to those who sit quietly with diversified stock portfolios for decades and decades.
That lesson was reinforced by a recent study from Morningstar. The Chicago investment research firm found that fund investors earned 7.7% a year on the average dollar they invested in mutual funds and exchange-traded funds over the 10 years through year-end 2020. That was 1.7 percentage points less than the total return of the funds themselves.
What explains this shortfall? It all comes down to bad timing, with investors tending to invest more heavily in a fund before it suffers a period of relatively weak returns. But some funds triggered worse behavior than others. The biggest performance gaps occurred among more specialized funds, namely those that focus on single industry sectors and on alternative investments. For such funds, the shortfall was around four percentage points a year.
By contrast, the annual performance gap with general taxable bond funds and U.S. stock funds was 1.1 and 1.2 percentage points, respectively, while the gap with asset allocation funds���think target-date retirement funds���was just 0.7 percentage point.
How do we avoid buying and selling at the wrong time? Morningstar offers some sensible advice, such as sticking with broadly diversified funds, avoiding funds that are more specialized or more volatile, and putting our saving and investment programs on autopilot. To that list, I���d add three other pointers:
Play dumb. One of the smartest things we can do is regularly remind ourselves of our ignorance. If we find ourselves making risky investment bets or unloading a huge chunk of our stock portfolio, we���re doing so because we think we know something about future returns. Such ���knowledge��� is often poisonous to performance.
Play money. Many investors simply can���t resist meddling with their portfolio. To limit the potential damage, consider dividing your portfolio into ���play money��� and ���long-term growth money.��� Allow yourself to buy riskier investments and make market bets with perhaps 5% or 10% of your portfolio. Meanwhile, dedicate the rest of your investment dollars to a collection of index funds, such as the classic three-fund portfolio, and declare these investments untouchable.
Play it safe. To your ���play money��� and ���growth money,��� consider adding a third bucket: ���safe money.��� With this sleeve of your portfolio, the goal is to hold enough cash and short-term bonds so you don���t freak out.
How much should you hold? It���s easy enough to calculate your necessary cash holdings based on your likely portfolio withdrawals over the next five years and the sum you want for emergencies. But that���s the rational number.
What you need to figure out is the emotional number���the sum you need to set aside to keep yourself calm, so you don���t make big changes to your long-term growth money at times of market turmoil. How do you come up with that number? You���ll need to take a long, hard look in the mirror.
Latest Posts
HERE ARE THE SIX other articles published by HumbleDollar this week:
"One of my father's favorite snacks was popcorn with milk," recounts Kenyon Sayler. "I learned from my mother that one winter that was all my father���s family had for supper every evening."
If you delay Social Security by a year and instead dip into savings to cover the missed benefits, you're effectively buying an annuity with an 8% payout. That's a deal that's hard to beat, as Rick Connor explains.
Bottles of wine. Fine art. Private real estate deals. Mike Zaccardi took a walk on the wild side���and reports back on the alternative investments he bought.
"In retirement, there���s no need to strive for the applause of others or monetary reward," writes Joe Kesler. "Instead, we can focus on the satisfaction that comes from the results of our labor."
It turns out that active managers are pretty good at picking stocks that'll outperform over the next 12 months. The problem: They mess up when selling. Adam Grossman explains.
"I felt a little guilty about spending time and money on a mere hobby," says Andrew Forsythe. "Selling off a chunk of my collection to benefit a worthy cause has done wonders for assuaging my guilt."
What about blog posts? The past week���s pieces include Kristine Hayes on struggle and hope, Dick Quinn on his estate plan, Mike Zaccardi on dinner seminars, Greg Spears on 401(k) fees and Dennis Friedman on jobs vs. careers.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier��articles.
The goal: Keep more of whatever the financial markets deliver by minimizing investment costs and avoiding unnecessarily large tax bills. This is a reason to favor index funds. But even if we index, we need to be alert to another threat���that posed by the person in the mirror.
Two recent studies highlight the risk of self-inflicted investment wounds. ���When do investors freak out?��� asks the title of a new academic study. The paper looks at instances where a household���s stock holdings drop 90% or more in a month, of which at least 50% is due to trading.
Such ���freak outs��� tend to occur during sharp market declines, and they���re more common among those who are male, over age 45, married or have dependents. Freak outs are also more common among those who say they have excellent investment experience or knowledge.
For these investors, the big shift out of stocks tends to protect them in the short term. But they���re often too slow getting back into the stock market, so they miss out on significant gains. It���s become a clich��, but it���s worth repeating: What matters isn���t timing the market, but time in the market. The stock market���s big gains usually go to those who sit quietly with diversified stock portfolios for decades and decades.
That lesson was reinforced by a recent study from Morningstar. The Chicago investment research firm found that fund investors earned 7.7% a year on the average dollar they invested in mutual funds and exchange-traded funds over the 10 years through year-end 2020. That was 1.7 percentage points less than the total return of the funds themselves.
What explains this shortfall? It all comes down to bad timing, with investors tending to invest more heavily in a fund before it suffers a period of relatively weak returns. But some funds triggered worse behavior than others. The biggest performance gaps occurred among more specialized funds, namely those that focus on single industry sectors and on alternative investments. For such funds, the shortfall was around four percentage points a year.
By contrast, the annual performance gap with general taxable bond funds and U.S. stock funds was 1.1 and 1.2 percentage points, respectively, while the gap with asset allocation funds���think target-date retirement funds���was just 0.7 percentage point.
How do we avoid buying and selling at the wrong time? Morningstar offers some sensible advice, such as sticking with broadly diversified funds, avoiding funds that are more specialized or more volatile, and putting our saving and investment programs on autopilot. To that list, I���d add three other pointers:
Play dumb. One of the smartest things we can do is regularly remind ourselves of our ignorance. If we find ourselves making risky investment bets or unloading a huge chunk of our stock portfolio, we���re doing so because we think we know something about future returns. Such ���knowledge��� is often poisonous to performance.
Play money. Many investors simply can���t resist meddling with their portfolio. To limit the potential damage, consider dividing your portfolio into ���play money��� and ���long-term growth money.��� Allow yourself to buy riskier investments and make market bets with perhaps 5% or 10% of your portfolio. Meanwhile, dedicate the rest of your investment dollars to a collection of index funds, such as the classic three-fund portfolio, and declare these investments untouchable.
Play it safe. To your ���play money��� and ���growth money,��� consider adding a third bucket: ���safe money.��� With this sleeve of your portfolio, the goal is to hold enough cash and short-term bonds so you don���t freak out.
How much should you hold? It���s easy enough to calculate your necessary cash holdings based on your likely portfolio withdrawals over the next five years and the sum you want for emergencies. But that���s the rational number.
What you need to figure out is the emotional number���the sum you need to set aside to keep yourself calm, so you don���t make big changes to your long-term growth money at times of market turmoil. How do you come up with that number? You���ll need to take a long, hard look in the mirror.
Latest Posts
HERE ARE THE SIX other articles published by HumbleDollar this week:
"One of my father's favorite snacks was popcorn with milk," recounts Kenyon Sayler. "I learned from my mother that one winter that was all my father���s family had for supper every evening."
If you delay Social Security by a year and instead dip into savings to cover the missed benefits, you're effectively buying an annuity with an 8% payout. That's a deal that's hard to beat, as Rick Connor explains.
Bottles of wine. Fine art. Private real estate deals. Mike Zaccardi took a walk on the wild side���and reports back on the alternative investments he bought.
"In retirement, there���s no need to strive for the applause of others or monetary reward," writes Joe Kesler. "Instead, we can focus on the satisfaction that comes from the results of our labor."
It turns out that active managers are pretty good at picking stocks that'll outperform over the next 12 months. The problem: They mess up when selling. Adam Grossman explains.
"I felt a little guilty about spending time and money on a mere hobby," says Andrew Forsythe. "Selling off a chunk of my collection to benefit a worthy cause has done wonders for assuaging my guilt."
What about blog posts? The past week���s pieces include Kristine Hayes on struggle and hope, Dick Quinn on his estate plan, Mike Zaccardi on dinner seminars, Greg Spears on 401(k) fees and Dennis Friedman on jobs vs. careers.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier��articles.The post Behaving Badly appeared first on HumbleDollar.
September 17, 2021
Back to Normal
WE���VE ALL BEEN looking for signs that the financial world is returning to some semblance of normalcy. I recently read a CNBC��article��that gave me hope. The article said that worldwide dividend payouts were expected to reach $1.39 trillion in 2021, almost back to pre-pandemic levels.
The data came from a report by Janus Henderson, a U.K. money manager. Dividends in this year���s second quarter increased 26% from 2020���s second quarter and were only 6.8% below 2019���s second quarter. Janus expects dividends worldwide to return to pre-pandemic highs within the next 12 months.
Why is this important? Dividends have historically represented a significant portion of the stock market���s long-run total return, although the relative contribution of share-price appreciation and dividends can vary greatly over the decades. Morningstar provided a good analysis of the historical contribution of dividends to stock returns. Over the period 1872-2012, the S&P 500 provided a real total return of 6.5%, with 4.5 percentage points coming from dividends.
The contribution of dividends to total return has, however, been shrinking. Dividend yields were routinely above 5% in the first half of the 20th century. In the current century, they���ve dropped to less than 2%, as companies have put more emphasis on stock buybacks. Today, the S&P 500���s yield��is just 1.3%.
Analyses of long-term market returns show the value of dividends. But to achieve the highest returns, you need to reinvest those dividends. Reinvesting helps in two ways: You get the benefit of dollar-cost averaging as you buy more shares during market declines���and you enjoy the magic of compounding as you earn dividends on the dividends you���d earlier reinvested.
The data came from a report by Janus Henderson, a U.K. money manager. Dividends in this year���s second quarter increased 26% from 2020���s second quarter and were only 6.8% below 2019���s second quarter. Janus expects dividends worldwide to return to pre-pandemic highs within the next 12 months.
Why is this important? Dividends have historically represented a significant portion of the stock market���s long-run total return, although the relative contribution of share-price appreciation and dividends can vary greatly over the decades. Morningstar provided a good analysis of the historical contribution of dividends to stock returns. Over the period 1872-2012, the S&P 500 provided a real total return of 6.5%, with 4.5 percentage points coming from dividends.
The contribution of dividends to total return has, however, been shrinking. Dividend yields were routinely above 5% in the first half of the 20th century. In the current century, they���ve dropped to less than 2%, as companies have put more emphasis on stock buybacks. Today, the S&P 500���s yield��is just 1.3%.
Analyses of long-term market returns show the value of dividends. But to achieve the highest returns, you need to reinvest those dividends. Reinvesting helps in two ways: You get the benefit of dollar-cost averaging as you buy more shares during market declines���and you enjoy the magic of compounding as you earn dividends on the dividends you���d earlier reinvested.
The post Back to Normal appeared first on HumbleDollar.
Not Their Fault
"THE REALITY IS THAT most working Americans will continue to struggle to achieve retirement security because the ownership of financial assets is highly concentrated among the wealthiest," wrote Dan Doonan, executive director of the National Institute on Retirement Security, for Forbes.com.
I read and re-read that statement, especially the word ���because.��� It seems Doonan has concluded that the great wealth held by the top 1% somehow inhibits the rest of us from saving and investing. How can that be true? It can���t be unless there���s a finite pool of assets to be had and only a few have grabbed them.
The fact that many Americans are not saving for retirement, are not financially literate and choose to place short-term wants ahead of long-term goals is indeed a problem. But it isn���t one created by America���s billionaires. In fact, considering the jobs and opportunities created by many of the super-wealthy, I���d argue that the opposite is true.
I played a game of ���what if��� and looked at where I would be financially if I���d made modest investments in the early days of Microsoft, Apple, Amazon and a few others.�� With $100 here and $1,000 there, plus years of stock splits and dividends, I���d be well ensconced in the top 1% and I���d be booking a world cruise (but maybe not this year).
Like most people, I wasn���t savvy enough or a big enough risk-taker to grab those rewards. But the opportunity was there. On the other hand, like tens of millions of other Americans, I did fund my 401(k) and IRA. I bought a few stocks and bonds, and I reinvested my dividends and interest payments. I did this in small increments over many years and, during all those years, I never gave a thought to how others were accumulating billions���but I did enjoy using my iPhone, getting bargains via Amazon, and maybe someday I���ll help the environment and buy a Tesla.
There are some Americans, perhaps 20% or so, who live pretty much paycheck-to-paycheck and struggle to cover life���s necessities. But for the majority, there���s opportunity to amass wealth. That ability to do so has nothing to do with the level of wealth of any other American.
A year ago, I��wrote about ways most of us can save money and accumulate wealth. A little earlier, I��wrote about setting priorities for spending the money we have. In both cases, it boils down to the choices we make. For most Americans, there���s simply no excuse for failing to save enough for retirement.
The post Not Their Fault appeared first on HumbleDollar.
Going to the Dogs
"THERE IS A VERY fine line between 'hobby' and 'mental illness'," according to humorist Dave Barry.
Some years ago, we had a weekend place���a cabin on acreage���which we greatly enjoyed, even if it did come with challenges. One thing I especially enjoyed: taking the kids on nighttime walks to see how many critters we could spot. That led to an interest in flashlights, and I collected a bunch of them. That, in turn, led to a keen interest in pocketknives.
Believe it or not, there���s a strong overlap between flashaholics and knifeaholics. In recent years, I���ve amassed a sizable collection of knives, sharpening equipment and so on, plus a goodly number of shiny new flashlights as the ongoing advances in LED technology continue to impress me.
But even more than pocketknives or flashlights, I love dogs. In fact, every member of our family shares this affection for our canine friends. Maybe there���s a gene? Over the years, my wife and I have contributed���regularly, if modestly���to a variety of animal welfare organizations that help the pups. But I���ve always wanted to do more.
Nine years ago, I hit upon a way to combine two of my great loves���an annual pocketknife benefit sale. I���m active on a large online knife forum where I regularly discuss���as well as buy and sell���knives. Typical collector that I am, I always have too many knives. I decided to sell a portion and donate the proceeds to worthy organizations that help dogs.
If I���m honest, I have to admit that another purpose was served. During most of my career, I worked long hours with no spare time for much else. In recent years, I gradually slowed down my work, allowing me to take on a hobby. Now I���m retired, I have the luxury of even more available time. But I confess that, through it all, I���ve suffered from an overactive work ethic. I felt a little guilty about spending time and money on a mere hobby. Selling off a chunk of my collection to benefit a worthy cause has done wonders for assuaging my guilt.
Happily, the benefit sale has grown substantially over the years. I���ve even had good luck lining up matching donations for whatever sum I could raise. It turns out that lots of ���knife people��� are also ���dog people.��� Many good-hearted folks have bought knives during the benefit sale, kicked in extra cash contributions, and generally offered moral support and encouragement.
Moreover, a number of really remarkable gentlemen every year donate a bunch of their own knives for me to sell for the cause. This has resulted in yet another collateral benefit of the sale. I have a host of great friends from the knife forum who I enjoy keeping up with throughout the year.
You can check out the opening chapter of my most recent sale here���and the happy ending here. The latest sale raised $8,465.
I know my experience isn���t unique. There are countless other people who have combined a hobby with a good cause. One of my favorite examples: A retired doctor used his love of flying to start a transport service for shelter dogs. The pilots fly dogs from areas of the country with overcrowded shelters���where the dogs are doomed to euthanasia���to parts of the country where shelters are less crowded, so the dogs can be placed in loving homes. The name of the charity: Dog is My CoPilot.
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.
Some years ago, we had a weekend place���a cabin on acreage���which we greatly enjoyed, even if it did come with challenges. One thing I especially enjoyed: taking the kids on nighttime walks to see how many critters we could spot. That led to an interest in flashlights, and I collected a bunch of them. That, in turn, led to a keen interest in pocketknives.
Believe it or not, there���s a strong overlap between flashaholics and knifeaholics. In recent years, I���ve amassed a sizable collection of knives, sharpening equipment and so on, plus a goodly number of shiny new flashlights as the ongoing advances in LED technology continue to impress me.
But even more than pocketknives or flashlights, I love dogs. In fact, every member of our family shares this affection for our canine friends. Maybe there���s a gene? Over the years, my wife and I have contributed���regularly, if modestly���to a variety of animal welfare organizations that help the pups. But I���ve always wanted to do more.
Nine years ago, I hit upon a way to combine two of my great loves���an annual pocketknife benefit sale. I���m active on a large online knife forum where I regularly discuss���as well as buy and sell���knives. Typical collector that I am, I always have too many knives. I decided to sell a portion and donate the proceeds to worthy organizations that help dogs.
If I���m honest, I have to admit that another purpose was served. During most of my career, I worked long hours with no spare time for much else. In recent years, I gradually slowed down my work, allowing me to take on a hobby. Now I���m retired, I have the luxury of even more available time. But I confess that, through it all, I���ve suffered from an overactive work ethic. I felt a little guilty about spending time and money on a mere hobby. Selling off a chunk of my collection to benefit a worthy cause has done wonders for assuaging my guilt.
Happily, the benefit sale has grown substantially over the years. I���ve even had good luck lining up matching donations for whatever sum I could raise. It turns out that lots of ���knife people��� are also ���dog people.��� Many good-hearted folks have bought knives during the benefit sale, kicked in extra cash contributions, and generally offered moral support and encouragement.
Moreover, a number of really remarkable gentlemen every year donate a bunch of their own knives for me to sell for the cause. This has resulted in yet another collateral benefit of the sale. I have a host of great friends from the knife forum who I enjoy keeping up with throughout the year.
You can check out the opening chapter of my most recent sale here���and the happy ending here. The latest sale raised $8,465.
I know my experience isn���t unique. There are countless other people who have combined a hobby with a good cause. One of my favorite examples: A retired doctor used his love of flying to start a transport service for shelter dogs. The pilots fly dogs from areas of the country with overcrowded shelters���where the dogs are doomed to euthanasia���to parts of the country where shelters are less crowded, so the dogs can be placed in loving homes. The name of the charity: Dog is My CoPilot.
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 Going to the Dogs appeared first on HumbleDollar.
September 16, 2021
Debt Despite Myself
I HATE DEBT. A very happy day was when we paid off the mortgage. I���d rather walk on broken glass than pay a penny of interest on my credit cards. But there have been a few exceptions to my usual rule, all involving car purchases.
The first was many years ago when I reached what I thought was an all-cash deal on a new car. The salesman surprised me when he offered the same price with 0% financing. It seemed like a no-lose proposition, and I took him up on it.
Several years later, I was similarly negotiating a cash offer on a new car. The salesman likewise offered the same price with 0% financing. I pressed him to explain how the manufacturer made money on the deal. He shook his head and said it was even crazier than that: He got an extra $200 if he signed me up. I told him I���d do it if he���d split the $200. Deal done.
Finally, a few years ago, I was helping our youngest daughter buy a car. As usual, I was offering a cash deal. The dealership���s finance department offered very low financing, but not 0%, and I declined. The woman there told me I���d be doing my daughter a favor if we took the financing, put the loan in my daughter���s name with me as guarantor, made timely payments for a year and then paid off the balance. The interest cost would be minimal and my daughter would establish a solid credit score. I took the advice and the financing.
I signed my daughter up for a free Credit Karma account and, over the next several years, watched her credit score increase until she achieved the excellent score she enjoys today. Along the way, her score helped with several landlords as she applied for rentals. Recently, just after she and her new hubby closed on their first home, she called to thank me. Her highflying credit score was a key ingredient in snagging a very favorable mortgage rate.
The first was many years ago when I reached what I thought was an all-cash deal on a new car. The salesman surprised me when he offered the same price with 0% financing. It seemed like a no-lose proposition, and I took him up on it.
Several years later, I was similarly negotiating a cash offer on a new car. The salesman likewise offered the same price with 0% financing. I pressed him to explain how the manufacturer made money on the deal. He shook his head and said it was even crazier than that: He got an extra $200 if he signed me up. I told him I���d do it if he���d split the $200. Deal done.
Finally, a few years ago, I was helping our youngest daughter buy a car. As usual, I was offering a cash deal. The dealership���s finance department offered very low financing, but not 0%, and I declined. The woman there told me I���d be doing my daughter a favor if we took the financing, put the loan in my daughter���s name with me as guarantor, made timely payments for a year and then paid off the balance. The interest cost would be minimal and my daughter would establish a solid credit score. I took the advice and the financing.
I signed my daughter up for a free Credit Karma account and, over the next several years, watched her credit score increase until she achieved the excellent score she enjoys today. Along the way, her score helped with several landlords as she applied for rentals. Recently, just after she and her new hubby closed on their first home, she called to thank me. Her highflying credit score was a key ingredient in snagging a very favorable mortgage rate.
The post Debt Despite Myself appeared first on HumbleDollar.
More Than a Job
WHEN I WALK AROUND my neighborhood, I see beautiful and expensive automobiles parked on the street. When I look at the garages where these cars should be parked, they're full of stuff. I just can���t understand why someone would spend thousands of dollars on a vehicle and let it be exposed to theft, vandalism and severe weather, while their garage is used as a storage unit.
Even though I can still fit both our cars in our garage, I���m also guilty of using it for storing things I no longer have any use for. What do I have in our garage? Among the things you���ll find are hundreds of vinyl records, boxes of baseball cards, my late dog���s bowl and leash, and a 1978 payroll stub.
I admit most of the items are purely sentimental, but the old payroll stub isn���t. There���s a reason I held on to it for all these years. It wasn���t because of the huge amount of money I was making at the time. In fact, I was earning just $5.16 an hour, not a whole lot more than 1978���s federal minimum wage of $2.65���and less than I was earning in my previous job.
Still, when I received that payroll check, I knew it was something special. I didn���t just have a new job. For the first time as a college graduate with a history degree, I had a chance for a career. I���d just been hired by a large aerospace corporation with plenty of opportunities for advancement in an industry with seemingly unlimited growth potential.
I knew it would lead to a brighter future���and it did. The lesson I learned back then: When you���re starting out, sometimes the best job offer is the one that pays less.
Even though I can still fit both our cars in our garage, I���m also guilty of using it for storing things I no longer have any use for. What do I have in our garage? Among the things you���ll find are hundreds of vinyl records, boxes of baseball cards, my late dog���s bowl and leash, and a 1978 payroll stub.
I admit most of the items are purely sentimental, but the old payroll stub isn���t. There���s a reason I held on to it for all these years. It wasn���t because of the huge amount of money I was making at the time. In fact, I was earning just $5.16 an hour, not a whole lot more than 1978���s federal minimum wage of $2.65���and less than I was earning in my previous job.
Still, when I received that payroll check, I knew it was something special. I didn���t just have a new job. For the first time as a college graduate with a history degree, I had a chance for a career. I���d just been hired by a large aerospace corporation with plenty of opportunities for advancement in an industry with seemingly unlimited growth potential.
I knew it would lead to a brighter future���and it did. The lesson I learned back then: When you���re starting out, sometimes the best job offer is the one that pays less.
The post More Than a Job appeared first on HumbleDollar.
The Joy of Work
I���VE HAD SOME dreadful jobs in my life. I spent one summer putting metal plates under a huge press for eight hours a day. Once the plates were in the right position, I���d push some buttons that would cause the press to crash down and shape the metal into something useful.
The goal was to work fast because that meant more pay. Some of the workers disabled the safety features so they could produce more widgets and earn extra money. It was a joyful day when I walked out of that factory for the last time with all 10 fingers still attached.
Factory jobs made me appreciate landing a job in finance. The industry pays above-average wages, it isn���t back-breaking work and you get to use your brain to find creative solutions for customers.
But even a cushy finance career came with some curses. Granted, they weren���t physical curses, but more mental in nature. For one thing, everyone in finance is focused on the money. As a result, I think there are more fights over salaries and bonuses than in other industries. Those experiences partly explain why I find retirement so liberating.
And I���m hardly alone. In retirement, many of us can, for the first time, untether the value of our work from the paycheck it generates. The habit of thinking about work as something we do to make money is deeply ingrained. We can scarcely imagine what a Copernican revolution it is to evaluate work without considering the dollars involved.
Are you enjoying financial freedom or hoping to get there one day? Here are four suggestions to help you rethink the relationship between work and money.
First, take the idea that work is what we need to do to live, and turn it on its head. The goal is to live to work, not work to live. In its optimal form, work isn���t drudgery, but a delight in and of itself. A retired banker I know has restored numerous old Corvettes since leaving his job. He���s now considered a world-class restorer. He doesn���t do it for the money, but because of his love of the craft.
In the first half of life, when we get an idea at work, we���d ask, ���Will it sell?��� In retirement, we might instead ask, ���Is it good?��� Rather than considering what kind of profit our work can produce, we���re free to focus on whether it will challenge our spirits.
Second, in retirement, work is no longer something we want to get done as quickly as possible. In our careers, most of us looked forward to Fridays and a weekend of leisure. By contrast, in retirement, our leisure is often found in work. I never had much time while running banks to pursue my interest in writing. Today, I write because I have more free time, but also because it���s work that I love.
I have a good friend who pursued drag racing in his spare time while he was managing a company. Now that he���s sold his company, he is ���working��� more on his drag racing���and finding success. But it doesn���t feel like work. He doesn���t hurry to finish working on his cars so he can go fishing.
Third, in retirement, there���s no longer any need to strive for the applause of others or for monetary reward. Instead, we can focus on the satisfaction that comes from looking at the results of our labor. This is a reason many retirees find volunteering so fulfilling. They see the needs of their community met because of their unpaid efforts. Similarly, it���s no surprise that many retirement communities have a woodworking shop for residents. There���s a feeling of pride in craftsmanship that comes with spending hours with chisel and lathe.
Fourth, once retired, we���re able to devote ourselves to work that fits our nature. Some are gifted creatively, while others shine when it comes to technology or interpersonal relations. Retirement provides the time to eliminate the work for which we have no particular skill, and instead devote ourselves to work that matches our personality and gifts.
To be sure, some people may be ���tap dancing to work��� every day like Warren Buffett, who is still a CEO at age 91. For those lucky ones, there���s no reason to change. But for those of us who left our careers with sufficient wealth and have other interests, this season of life can be especially fulfilling, as we rediscover the joys of work.
Joe Kesler is the author of
Smart Money with Purpose
and the founder of a
website
with the same name, which is where a version of this article first appeared. He spent 40 years in community banking, assisting small businesses and consumers.��Joe served as chief executive of banks in Illinois and Montana. He currently lives with his wife in Missoula, Montana, spending his time writing on personal finance, serving on two bank boards and hiking in the Rocky Mountains. Check out Joe's previous articles.
The goal was to work fast because that meant more pay. Some of the workers disabled the safety features so they could produce more widgets and earn extra money. It was a joyful day when I walked out of that factory for the last time with all 10 fingers still attached.
Factory jobs made me appreciate landing a job in finance. The industry pays above-average wages, it isn���t back-breaking work and you get to use your brain to find creative solutions for customers.
But even a cushy finance career came with some curses. Granted, they weren���t physical curses, but more mental in nature. For one thing, everyone in finance is focused on the money. As a result, I think there are more fights over salaries and bonuses than in other industries. Those experiences partly explain why I find retirement so liberating.
And I���m hardly alone. In retirement, many of us can, for the first time, untether the value of our work from the paycheck it generates. The habit of thinking about work as something we do to make money is deeply ingrained. We can scarcely imagine what a Copernican revolution it is to evaluate work without considering the dollars involved.
Are you enjoying financial freedom or hoping to get there one day? Here are four suggestions to help you rethink the relationship between work and money.
First, take the idea that work is what we need to do to live, and turn it on its head. The goal is to live to work, not work to live. In its optimal form, work isn���t drudgery, but a delight in and of itself. A retired banker I know has restored numerous old Corvettes since leaving his job. He���s now considered a world-class restorer. He doesn���t do it for the money, but because of his love of the craft.
In the first half of life, when we get an idea at work, we���d ask, ���Will it sell?��� In retirement, we might instead ask, ���Is it good?��� Rather than considering what kind of profit our work can produce, we���re free to focus on whether it will challenge our spirits.
Second, in retirement, work is no longer something we want to get done as quickly as possible. In our careers, most of us looked forward to Fridays and a weekend of leisure. By contrast, in retirement, our leisure is often found in work. I never had much time while running banks to pursue my interest in writing. Today, I write because I have more free time, but also because it���s work that I love.
I have a good friend who pursued drag racing in his spare time while he was managing a company. Now that he���s sold his company, he is ���working��� more on his drag racing���and finding success. But it doesn���t feel like work. He doesn���t hurry to finish working on his cars so he can go fishing.
Third, in retirement, there���s no longer any need to strive for the applause of others or for monetary reward. Instead, we can focus on the satisfaction that comes from looking at the results of our labor. This is a reason many retirees find volunteering so fulfilling. They see the needs of their community met because of their unpaid efforts. Similarly, it���s no surprise that many retirement communities have a woodworking shop for residents. There���s a feeling of pride in craftsmanship that comes with spending hours with chisel and lathe.
Fourth, once retired, we���re able to devote ourselves to work that fits our nature. Some are gifted creatively, while others shine when it comes to technology or interpersonal relations. Retirement provides the time to eliminate the work for which we have no particular skill, and instead devote ourselves to work that matches our personality and gifts.
To be sure, some people may be ���tap dancing to work��� every day like Warren Buffett, who is still a CEO at age 91. For those lucky ones, there���s no reason to change. But for those of us who left our careers with sufficient wealth and have other interests, this season of life can be especially fulfilling, as we rediscover the joys of work.
Joe Kesler is the author of
Smart Money with Purpose
and the founder of a
website
with the same name, which is where a version of this article first appeared. He spent 40 years in community banking, assisting small businesses and consumers.��Joe served as chief executive of banks in Illinois and Montana. He currently lives with his wife in Missoula, Montana, spending his time writing on personal finance, serving on two bank boards and hiking in the Rocky Mountains. Check out Joe's previous articles.The post The Joy of Work appeared first on HumbleDollar.
September 15, 2021
Final Countdown
AS I TYPE THIS, I���m less than a week from walking out the door of my workplace for the last time, bringing my second career to a close. I���m looking forward to the rest of my life.
We���ve been anticipating this day and we���re more than ready. My wife is already retired. My work for a large corporation is fine, but I���m not passionate about it. While there are some positive aspects to where we currently live, the best part is the airport. We predicted some time ago that, if my job still had us here when we got to this point, we���d be calling it quits and taking our life���s possessions elsewhere.
We���ve thought a lot about how we���ll support ourselves financially���what combination of pension benefit, retirement accounts, taxable accounts and Social Security benefits will carry us through the rest of our lives. Maybe that���s a topic for a future article. Short version: We���re comfortable with our situation and we have no hesitation about our decision to retire.
We���ve also thought a lot about where and how to live, which is also a subject for another day. Short version again: We haven���t decided. We aren���t in as much of a hurry to move as we expected to be. One reason: We didn���t anticipate some of our close relatives would be living in Spain. There���s no telling how long they���ll be there, so���before we do anything else���we���ll spend some time with them. And who knows? In the next few years, we may make a surprise addition to our future hometown shortlist.
A lot of folks find it bittersweet to leave behind fulltime work. I get it. Leaving my first career in the military was like that. But this time, I���m happy to say it���s all sweet.
We���ve been anticipating this day and we���re more than ready. My wife is already retired. My work for a large corporation is fine, but I���m not passionate about it. While there are some positive aspects to where we currently live, the best part is the airport. We predicted some time ago that, if my job still had us here when we got to this point, we���d be calling it quits and taking our life���s possessions elsewhere.
We���ve thought a lot about how we���ll support ourselves financially���what combination of pension benefit, retirement accounts, taxable accounts and Social Security benefits will carry us through the rest of our lives. Maybe that���s a topic for a future article. Short version: We���re comfortable with our situation and we have no hesitation about our decision to retire.
We���ve also thought a lot about where and how to live, which is also a subject for another day. Short version again: We haven���t decided. We aren���t in as much of a hurry to move as we expected to be. One reason: We didn���t anticipate some of our close relatives would be living in Spain. There���s no telling how long they���ll be there, so���before we do anything else���we���ll spend some time with them. And who knows? In the next few years, we may make a surprise addition to our future hometown shortlist.
A lot of folks find it bittersweet to leave behind fulltime work. I get it. Leaving my first career in the military was like that. But this time, I���m happy to say it���s all sweet.
The post Final Countdown appeared first on HumbleDollar.
Income for Sale
"SHOULD YOU BUY an annuity from Social Security?" That���s the title of a paper released by Boston College���s Center for Retirement Research (CRR) in May 2012. It���s one of the best articles I���ve ever read about the Social Security claiming decision���and it���s had a big impact on my thinking.
Most of us know what an income annuity is: You hand over a sum of money and, in return, receive a check every month for the rest of your life or for a specified period of time. It���s a way to guarantee a certain level of income. A traditional defined benefit pension is typically paid as an annuity, as is Social Security.
How do you buy an annuity from the Social Security Administration (SSA)? For each year that you delay claiming Social Security, your benefit increases by about 8%. The CRR paper makes the case that delaying Social Security, while using your savings to pay current expenses, is the equivalent of buying an annuity from the SSA. The annuity���s cost is the Social Security payments that you forgo in the meantime. What���s the benefit? That���s equal to the increase in your Social Security check you receive in return for the delay.
The paper provides this example: Assume you���re eligible for a $1,000-a-month Social Security benefit. Waiting a year would provide an approximately 8% increase in that benefit, to $1,080. In the meantime, you would���ve spent $1,000 a month from your savings to cover your living costs.
The upshot: You���ve paid $12,000 during that first year to receive an $80 a month���or $960 a year���increase in your Social Security benefit. The paper says you should think of it just that way: You bought a $960-a-year lifetime annuity from the SSA for $12,000. That���s an 8% return. Even better, that $960 a year will increase annually along with inflation. On top of that, if you���re married, you had the higher lifetime earnings and you predecease your spouse, your benefit will be paid to your husband or wife as a survivor benefit.
The paper provided current rates for inflation-protected annuities for men, women and couples for ages ranging from 62 to 70. Commercial annuity rates vary with age, gender and survivorship benefits. Rates are lower for women, reflecting their longer average longevity. Annuity rates are lower still for plans that provide benefits to a surviving spouse.
When the paper was published in 2012, available annuity rates for an inflation-protected lifetime annuity ranged from 5.9% for a 69-year-old single male to 4.5% for a 62-year-old single male. Single female rates ranged from 5.3% to 4.1%, and couples��� rates���with 100% paid to the survivor���ranged from 4.3% to 3.4%. All of these were below the 8% available when you buy an annuity from Social Security.
I checked Fidelity Investments��� annuity site to get current rates. The site didn���t offer any inflation-protected annuities���it seems no insurer currently offers them. What about fixed annuities, those that pay the same dollar amount every year? Those ranged from 5.4% to 6.3% for men and from 5.1% to 6.2% for females, again using ages 62 and 69. For couples, the annuity rates ranged from 4.6% to 4.9%.
The site did offer a few options with a guaranteed 2% yearly increase in benefits for couples. For a couple with a 62-year-old male and six-month younger female, the annuity rate was 3.6%. For a 69-year-old male and six-month younger female, the annuity rate was 3.9%.
As you can see, an annuity from the SSA provides a better return than commercially available annuities. This is especially true for couples.
I���ve sent the paper to dozens of friends, colleagues and family members. From the responses I���ve received, I���ve come to realize that the Social Security claiming decision is as much emotional as it is financial. The paper makes a very strong case for delaying Social Security for as long as possible, especially when interest rates are low. But many folks won���t even listen to the argument.
Richard Connor is��a semi-retired aerospace engineer with a keen interest in finance. He��enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter��@RConnor609��and check out his earlier articles.
Most of us know what an income annuity is: You hand over a sum of money and, in return, receive a check every month for the rest of your life or for a specified period of time. It���s a way to guarantee a certain level of income. A traditional defined benefit pension is typically paid as an annuity, as is Social Security.
How do you buy an annuity from the Social Security Administration (SSA)? For each year that you delay claiming Social Security, your benefit increases by about 8%. The CRR paper makes the case that delaying Social Security, while using your savings to pay current expenses, is the equivalent of buying an annuity from the SSA. The annuity���s cost is the Social Security payments that you forgo in the meantime. What���s the benefit? That���s equal to the increase in your Social Security check you receive in return for the delay.
The paper provides this example: Assume you���re eligible for a $1,000-a-month Social Security benefit. Waiting a year would provide an approximately 8% increase in that benefit, to $1,080. In the meantime, you would���ve spent $1,000 a month from your savings to cover your living costs.
The upshot: You���ve paid $12,000 during that first year to receive an $80 a month���or $960 a year���increase in your Social Security benefit. The paper says you should think of it just that way: You bought a $960-a-year lifetime annuity from the SSA for $12,000. That���s an 8% return. Even better, that $960 a year will increase annually along with inflation. On top of that, if you���re married, you had the higher lifetime earnings and you predecease your spouse, your benefit will be paid to your husband or wife as a survivor benefit.
The paper provided current rates for inflation-protected annuities for men, women and couples for ages ranging from 62 to 70. Commercial annuity rates vary with age, gender and survivorship benefits. Rates are lower for women, reflecting their longer average longevity. Annuity rates are lower still for plans that provide benefits to a surviving spouse.
When the paper was published in 2012, available annuity rates for an inflation-protected lifetime annuity ranged from 5.9% for a 69-year-old single male to 4.5% for a 62-year-old single male. Single female rates ranged from 5.3% to 4.1%, and couples��� rates���with 100% paid to the survivor���ranged from 4.3% to 3.4%. All of these were below the 8% available when you buy an annuity from Social Security.
I checked Fidelity Investments��� annuity site to get current rates. The site didn���t offer any inflation-protected annuities���it seems no insurer currently offers them. What about fixed annuities, those that pay the same dollar amount every year? Those ranged from 5.4% to 6.3% for men and from 5.1% to 6.2% for females, again using ages 62 and 69. For couples, the annuity rates ranged from 4.6% to 4.9%.
The site did offer a few options with a guaranteed 2% yearly increase in benefits for couples. For a couple with a 62-year-old male and six-month younger female, the annuity rate was 3.6%. For a 69-year-old male and six-month younger female, the annuity rate was 3.9%.
As you can see, an annuity from the SSA provides a better return than commercially available annuities. This is especially true for couples.
I���ve sent the paper to dozens of friends, colleagues and family members. From the responses I���ve received, I���ve come to realize that the Social Security claiming decision is as much emotional as it is financial. The paper makes a very strong case for delaying Social Security for as long as possible, especially when interest rates are low. But many folks won���t even listen to the argument.
Richard Connor is��a semi-retired aerospace engineer with a keen interest in finance. He��enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter��@RConnor609��and check out his earlier articles.The post Income for Sale appeared first on HumbleDollar.
September 14, 2021
Dinner Is Served
HOW LUCKY I WAS to be the recipient of a dinner invitation to Ruth���s Chris. I love a sizzling ribeye, so I booked my seat at the event. Those nearing and in retirement have a good idea of what I���m referring to���the good old annuity sales presentation.
These dinners are put on by financial advisors looking to expand their business. The routine goes like this: Invite prospects, present for an hour on the benefits of owning insurance or an annuity, and then let the guests enjoy their meal while attempting to book appointments.
It must work because these invitations are distributed all the time, though usually not to millennials like me. More often, it���s affluent couples in their 60s who get the flyers in the mail.
What I find interesting at these gatherings���I���ve been to a few���is the advisor���s sales tactics. I���m reminded of the strategies detailed in Influence, Robert Cialdini���s bestselling book:
Reciprocity.�����The advisor is kind enough to buy me a $100 meal? The least I can do is hear him out and perhaps buy his product if it sounds helpful.���
Social proof. ���I see couples making appointments. Oh, and table No. 1 has a few existing clients of his. They look like happy people. Maybe I should give him a chance.���
Commitment.�����Well, I RSVP���d to this dinner and now I���ve hesitantly booked an appointment. I might as well follow through and trust this guy.���
Authority.�����He has the credentials and his points make a lot of sense. And those were some scary stock market predictions. I sure don���t want to lose my retirement assets in the next crash.���
I never booked an appointment. I always leave these events worried for that innocent older couple who clearly don���t have a plan.
Such dinners underscore the value of true fiduciary financial advisors���some of whom even host such presentations with all the right intentions. Individual investors just need to be careful and remember to do their due diligence when choosing an advisor. Otherwise, that free steak could turn out to be mighty expensive.
These dinners are put on by financial advisors looking to expand their business. The routine goes like this: Invite prospects, present for an hour on the benefits of owning insurance or an annuity, and then let the guests enjoy their meal while attempting to book appointments.
It must work because these invitations are distributed all the time, though usually not to millennials like me. More often, it���s affluent couples in their 60s who get the flyers in the mail.
What I find interesting at these gatherings���I���ve been to a few���is the advisor���s sales tactics. I���m reminded of the strategies detailed in Influence, Robert Cialdini���s bestselling book:
Reciprocity.�����The advisor is kind enough to buy me a $100 meal? The least I can do is hear him out and perhaps buy his product if it sounds helpful.���
Social proof. ���I see couples making appointments. Oh, and table No. 1 has a few existing clients of his. They look like happy people. Maybe I should give him a chance.���
Commitment.�����Well, I RSVP���d to this dinner and now I���ve hesitantly booked an appointment. I might as well follow through and trust this guy.���
Authority.�����He has the credentials and his points make a lot of sense. And those were some scary stock market predictions. I sure don���t want to lose my retirement assets in the next crash.���
I never booked an appointment. I always leave these events worried for that innocent older couple who clearly don���t have a plan.
Such dinners underscore the value of true fiduciary financial advisors���some of whom even host such presentations with all the right intentions. Individual investors just need to be careful and remember to do their due diligence when choosing an advisor. Otherwise, that free steak could turn out to be mighty expensive.
The post Dinner Is Served appeared first on HumbleDollar.
