Jonathan Clements's Blog, page 270
August 29, 2021
Quinn’s Commands
DEAR 18-YEAR-OLD: You may be better educated and more intelligent than me. You may have more potential. But for sure you don���t have more experience. I have 60 years on you, so���as hard as it may be���take my advice:
There are no guarantees in life. You have to make of it what you will. Never give up.
You will have obstacles placed before you. You will be treated unfairly. You will have to deal with less-than-honorable individuals. You will be slighted and overlooked at times. Get over it and move on.
A college education gives you what you put into it. Obtaining a degree means nothing if you got that piece of paper simply by getting by.
Once you���re hired for your first job, where you went to college is meaningless. It���s up to you to prove your value to your first and subsequent employers.
Political rhetoric about inequality is irrelevant to you. There are as many opportunities today as there have ever been, perhaps more. If money is your goal, there���s no reason you can���t make it. But it will take drive, creativity, effort, dedication and perseverance. Look within, not without.
If you seek a career that isn���t about money, but rather about things more important to you���service to others, the arts���that���s fine. Just know there���s a price to be paid. Don���t envy others or expect more financial reward than your choices can deliver.
The system is always rigged by some people and for some people. No denying it, it���s harder for some folks to get ahead. That���s always been the case and always will be. Ignore it.
Eschew seeking what you feel you���re entitled to, rather than what you earned. All you���re entitled to is stated in the Declaration of Independence.
Take responsibility for your actions and choices. Keep a mirror handy.
Be prudent with money. Always save first before you spend a single cent. Live within or below your means. Never pay credit-card interest. Avoid the accumulation of unnecessary stuff.
Be aware. Pay attention to what���s happening in the world so you���re better prepared to separate fact from opinion.
Plan ahead. Think long term. The future is not as far away as you may think.
There are no guarantees in life. You have to make of it what you will. Never give up.
You will have obstacles placed before you. You will be treated unfairly. You will have to deal with less-than-honorable individuals. You will be slighted and overlooked at times. Get over it and move on.
A college education gives you what you put into it. Obtaining a degree means nothing if you got that piece of paper simply by getting by.
Once you���re hired for your first job, where you went to college is meaningless. It���s up to you to prove your value to your first and subsequent employers.
Political rhetoric about inequality is irrelevant to you. There are as many opportunities today as there have ever been, perhaps more. If money is your goal, there���s no reason you can���t make it. But it will take drive, creativity, effort, dedication and perseverance. Look within, not without.
If you seek a career that isn���t about money, but rather about things more important to you���service to others, the arts���that���s fine. Just know there���s a price to be paid. Don���t envy others or expect more financial reward than your choices can deliver.
The system is always rigged by some people and for some people. No denying it, it���s harder for some folks to get ahead. That���s always been the case and always will be. Ignore it.
Eschew seeking what you feel you���re entitled to, rather than what you earned. All you���re entitled to is stated in the Declaration of Independence.
Take responsibility for your actions and choices. Keep a mirror handy.
Be prudent with money. Always save first before you spend a single cent. Live within or below your means. Never pay credit-card interest. Avoid the accumulation of unnecessary stuff.
Be aware. Pay attention to what���s happening in the world so you���re better prepared to separate fact from opinion.
Plan ahead. Think long term. The future is not as far away as you may think.
The post Quinn’s Commands appeared first on HumbleDollar.
Back to School
A WHILE BACK, I assembled two personal finance reading lists���what I called��101��and��201��level titles. But time doesn���t stand still. Below is a list of newer books, along with a few classics that didn���t fit on the earlier lists. They���re organized into three categories: retirement planning, investing and behavioral finance.
Retirement Planning
Can I Retire?��by Mike Piper.��There���s no shortage of retirement books. But if you want a straightforward guide that covers the most critical topics in an easy-to-read format, there���s no better starting point than this. The author is a well-known CPA, writer and speaker. While the book is short���just 100 pages���it isn���t short on valuable strategies for retirees. It includes, for example, sections on Roth conversions, Social Security and even annuities������the good kind,��� in Piper���s words.
The New Retirement Savings Time Bomb��by Ed Slott.��If��Can I Retire��is like a field guide to retirement, this book is more like an encyclopedia. Will you read it cover to cover? It���s unlikely. But if your financial situation involves even the least bit of complexity, this is a book you���ll definitely want on your shelf.
Investing
The Innovator���s Dilemma��by Clayton Christensen.��Why do I recommend index funds over individual stocks? There are many reasons, but this book addresses the one that���s maybe the most counterintuitive: It explains how companies that look unstoppable���like Kodak and Sears���can descend into bankruptcy after years of industry dominance. But this isn���t a history book. It���s a framework for understanding the lifecycle of businesses. For investors, that���s a critical idea to grasp, especially if you own shares in any of today���s seemingly unstoppable companies.
How a Second Grader Beats Wall Street��by Allan Roth.��As its title suggests, the premise of this book is that you don���t need an advanced degree to be a successful investor. To prove his point, investment advisor Allan Roth worked with his eight-year-old son, Kevin, to build a portfolio. It wasn���t complicated���just three funds. But lo and behold, it did admirably well. That was precisely Roth���s point. His view, which I share, is that Wall Street tends to overcomplicate investments. And yet, if you take the opposite approach and favor simplicity, you���ll often end up with better results.
The Automatic Millionaire��by David Bach.��If you���ve heard the term ���the latte factor,��� this is where it comes from. But because of it, the author has received his fair share of criticism. If you aren���t familiar with it, the latte factor suggests that all you need to do to become a millionaire is to cut out trips to Starbucks and instead save an extra $5 a day. This idea has been criticized because it sounds too simple. The reality, though, is that Bach���s math is correct. Sure, he does assume 10% annual returns���consistent with an all-stock portfolio. Maybe that���s an aggressive assumption. But his overall point is valid: No matter what stage you���re at in your financial life���even if money is tight���you can afford to save at least a few dollars. If you do that for enough years, you���ll make more progress than you might have guessed.
America���s Bank��by Roger Lowenstein.��During the Great Depression, stocks fell about 90%. In the years since, we haven���t seen a drop nearly that bad. But it���s fair to ask whether it could happen again. Some commentators argue that it���s possible. Or rather, they see no reason it��couldn���t happen. But others point to the Federal Reserve and argue that today our central bank would step in���much like it did last year���so things couldn���t get as bad as they did during the Depression. No one can say for sure, but it���s a good question to consider. To better understand the Fed and its origins, this book is an excellent starting point.
My final entry in this category is a group of four titles.��What do they have in common? All chronicle instances of outstanding investment success by active managers.��The Greatest Trade Ever��by Gregory Zuckerman tells the story of John Paulson, the hedge fund manager who successfully shorted subprime mortgage bonds in the 2000s.�� The Man Who Solved the Market , also by Zuckerman, traces the history of James Simons and his quantitative hedge fund firm, Renaissance Technologies.��You Can Be a Stock Market Genius��by Joel Greenblatt describes the off-the-beaten-path techniques this hedge fund manager used to generate outsized returns at his firm, Gotham Capital. And in��Margin of Safety, hedge fund manager Seth Klarman describes his approach to value investing. (Margin of Safety is out of print and often sold for absurd prices, but can be found online as a free��PDF.)
Why am I recommending these books about hedge funds, when they���re precisely the kind of high-cost, actively managed investments I advise against? These stories are important to read, in my opinion, because they illustrate just how hard it is to find extraordinary active managers. I don���t doubt that you can make a fortune in an actively managed fund, but such skill is exceedingly rare. That makes it awfully difficult for individual investors to identify these funds. That's why I recommend the alternative, which is to avoid active management altogether.
Behavioral Finance
Noise��by Daniel Kahneman, Olivier Sibony and Cass Sunstein. Thanks in large part to Kahneman���s work, most investors are familiar with the idea of behavioral biases and how they can affect investment decisions. This book breaks new ground, describing another type of flaw in human judgment: The authors call it��noise. The difference between a bias and noise is that biases cause us to make the same error consistently. For example, recency bias causes investors to consistently put more weight on events that have occurred most recently.
Meanwhile, noise causes us to make errors��randomly. The authors found noise among experts in a variety of professions, ranging from loan officers to insurance adjusters to cardiac surgeons. In all these cases, experts who should have reached the same conclusion on seemingly objective questions ended up frequently disagreeing with each other. On top of that, the authors found that people���s judgments are often inconsistent with��their own��earlier judgments. As with other decision-making pitfalls, there���s no simple fix, though the authors do offer some suggestions. But simply being aware of this category of error can help you avoid it.
Narrative Economics��by Robert Shiller.��Investing, as the saying goes, is simple but not easy. One reason: It���s highly susceptible to storytelling. This applies both when the market is riding high and when it���s doing poorly. Veteran investment manager Jeremy Grantham put it well: In March 2009, when everything looked bleak, he urged investors to avoid doomsayers, who ���will start to predict the end of the world, armed with plenty of terrifying and accurate data....��� That���s precisely the challenge for investors: With so much data available, any informed person could construct virtually any argument���either for or against���virtually any investment. This book is somewhat academic and not an easy read, but it���s an important idea.
Adam M. Grossman��is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman��and check out his earlier articles.
Retirement Planning
Can I Retire?��by Mike Piper.��There���s no shortage of retirement books. But if you want a straightforward guide that covers the most critical topics in an easy-to-read format, there���s no better starting point than this. The author is a well-known CPA, writer and speaker. While the book is short���just 100 pages���it isn���t short on valuable strategies for retirees. It includes, for example, sections on Roth conversions, Social Security and even annuities������the good kind,��� in Piper���s words.
The New Retirement Savings Time Bomb��by Ed Slott.��If��Can I Retire��is like a field guide to retirement, this book is more like an encyclopedia. Will you read it cover to cover? It���s unlikely. But if your financial situation involves even the least bit of complexity, this is a book you���ll definitely want on your shelf.
Investing
The Innovator���s Dilemma��by Clayton Christensen.��Why do I recommend index funds over individual stocks? There are many reasons, but this book addresses the one that���s maybe the most counterintuitive: It explains how companies that look unstoppable���like Kodak and Sears���can descend into bankruptcy after years of industry dominance. But this isn���t a history book. It���s a framework for understanding the lifecycle of businesses. For investors, that���s a critical idea to grasp, especially if you own shares in any of today���s seemingly unstoppable companies.
How a Second Grader Beats Wall Street��by Allan Roth.��As its title suggests, the premise of this book is that you don���t need an advanced degree to be a successful investor. To prove his point, investment advisor Allan Roth worked with his eight-year-old son, Kevin, to build a portfolio. It wasn���t complicated���just three funds. But lo and behold, it did admirably well. That was precisely Roth���s point. His view, which I share, is that Wall Street tends to overcomplicate investments. And yet, if you take the opposite approach and favor simplicity, you���ll often end up with better results.
The Automatic Millionaire��by David Bach.��If you���ve heard the term ���the latte factor,��� this is where it comes from. But because of it, the author has received his fair share of criticism. If you aren���t familiar with it, the latte factor suggests that all you need to do to become a millionaire is to cut out trips to Starbucks and instead save an extra $5 a day. This idea has been criticized because it sounds too simple. The reality, though, is that Bach���s math is correct. Sure, he does assume 10% annual returns���consistent with an all-stock portfolio. Maybe that���s an aggressive assumption. But his overall point is valid: No matter what stage you���re at in your financial life���even if money is tight���you can afford to save at least a few dollars. If you do that for enough years, you���ll make more progress than you might have guessed.
America���s Bank��by Roger Lowenstein.��During the Great Depression, stocks fell about 90%. In the years since, we haven���t seen a drop nearly that bad. But it���s fair to ask whether it could happen again. Some commentators argue that it���s possible. Or rather, they see no reason it��couldn���t happen. But others point to the Federal Reserve and argue that today our central bank would step in���much like it did last year���so things couldn���t get as bad as they did during the Depression. No one can say for sure, but it���s a good question to consider. To better understand the Fed and its origins, this book is an excellent starting point.
My final entry in this category is a group of four titles.��What do they have in common? All chronicle instances of outstanding investment success by active managers.��The Greatest Trade Ever��by Gregory Zuckerman tells the story of John Paulson, the hedge fund manager who successfully shorted subprime mortgage bonds in the 2000s.�� The Man Who Solved the Market , also by Zuckerman, traces the history of James Simons and his quantitative hedge fund firm, Renaissance Technologies.��You Can Be a Stock Market Genius��by Joel Greenblatt describes the off-the-beaten-path techniques this hedge fund manager used to generate outsized returns at his firm, Gotham Capital. And in��Margin of Safety, hedge fund manager Seth Klarman describes his approach to value investing. (Margin of Safety is out of print and often sold for absurd prices, but can be found online as a free��PDF.)
Why am I recommending these books about hedge funds, when they���re precisely the kind of high-cost, actively managed investments I advise against? These stories are important to read, in my opinion, because they illustrate just how hard it is to find extraordinary active managers. I don���t doubt that you can make a fortune in an actively managed fund, but such skill is exceedingly rare. That makes it awfully difficult for individual investors to identify these funds. That's why I recommend the alternative, which is to avoid active management altogether.
Behavioral Finance
Noise��by Daniel Kahneman, Olivier Sibony and Cass Sunstein. Thanks in large part to Kahneman���s work, most investors are familiar with the idea of behavioral biases and how they can affect investment decisions. This book breaks new ground, describing another type of flaw in human judgment: The authors call it��noise. The difference between a bias and noise is that biases cause us to make the same error consistently. For example, recency bias causes investors to consistently put more weight on events that have occurred most recently.
Meanwhile, noise causes us to make errors��randomly. The authors found noise among experts in a variety of professions, ranging from loan officers to insurance adjusters to cardiac surgeons. In all these cases, experts who should have reached the same conclusion on seemingly objective questions ended up frequently disagreeing with each other. On top of that, the authors found that people���s judgments are often inconsistent with��their own��earlier judgments. As with other decision-making pitfalls, there���s no simple fix, though the authors do offer some suggestions. But simply being aware of this category of error can help you avoid it.
Narrative Economics��by Robert Shiller.��Investing, as the saying goes, is simple but not easy. One reason: It���s highly susceptible to storytelling. This applies both when the market is riding high and when it���s doing poorly. Veteran investment manager Jeremy Grantham put it well: In March 2009, when everything looked bleak, he urged investors to avoid doomsayers, who ���will start to predict the end of the world, armed with plenty of terrifying and accurate data....��� That���s precisely the challenge for investors: With so much data available, any informed person could construct virtually any argument���either for or against���virtually any investment. This book is somewhat academic and not an easy read, but it���s an important idea.
Adam M. Grossman��is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman��and check out his earlier articles.The post Back to School appeared first on HumbleDollar.
August 28, 2021
Life Sentence
WOULD YOU ADVISE someone���who doesn���t drive, doesn���t need a car and doesn���t plan to get one in the foreseeable future���to buy car insurance? I wouldn���t. But it seems some financial advisors think otherwise. That, at least, is the impression I got when an acquaintance, whom I���ll call Laura, mentioned her variable universal��life insurance policy to me.
A single woman in her mid-40s, Laura has a decent income and lives on her own. She has no one other than herself to support financially. Her parents and other family members have enough savings. She has no plans to start a family, let alone with someone who might be financially dependent on her. I just didn���t get it.
It turns out that a ���wealth advisor��� talked her into the life insurance policy as a sophisticated, tax-advantageous strategy. Laura is far from stupid. But she���s na��ve enough to follow professional financial recommendations blindly. She neither spotted the layers of fees involved, nor realized that permanent life insurance wasn���t the best way to build wealth. Now she does, and she isn���t happy about it.
It wasn���t apparent to Laura that she could���ve simply put her savings in a Roth retirement account���an even more attractive tax-advantaged vehicle���instead of investing in an insurance policy she didn���t need. To add insult to injury, when she tried to get out of the policy last year, she learned there are steep surrender��charges.
This costly mistake has a silver lining. Laura realized that financial ignorance isn���t an option for her, and now she���s seeking financial education rather than financial advice. Not surprisingly, she���s highly motivated���and learning fast.
A single woman in her mid-40s, Laura has a decent income and lives on her own. She has no one other than herself to support financially. Her parents and other family members have enough savings. She has no plans to start a family, let alone with someone who might be financially dependent on her. I just didn���t get it.
It turns out that a ���wealth advisor��� talked her into the life insurance policy as a sophisticated, tax-advantageous strategy. Laura is far from stupid. But she���s na��ve enough to follow professional financial recommendations blindly. She neither spotted the layers of fees involved, nor realized that permanent life insurance wasn���t the best way to build wealth. Now she does, and she isn���t happy about it.
It wasn���t apparent to Laura that she could���ve simply put her savings in a Roth retirement account���an even more attractive tax-advantaged vehicle���instead of investing in an insurance policy she didn���t need. To add insult to injury, when she tried to get out of the policy last year, she learned there are steep surrender��charges.
This costly mistake has a silver lining. Laura realized that financial ignorance isn���t an option for her, and now she���s seeking financial education rather than financial advice. Not surprisingly, she���s highly motivated���and learning fast.
The post Life Sentence appeared first on HumbleDollar.
YouTube, Your Child
I���VE HEARD SOME parents say that, while they don���t like their kids watching online videos, at least they aren���t being exposed to the ads that inundate kids on regular TV.
Nope. Advertising is at least as pervasive, and definitely more insidious, on the web. Kids have shifted from network television to web-viewing, and advertisers have trailed right behind them with Willie Sutton logic���because that���s where the money is.
YouTube is the most popular video streaming site in the world. Kids watch it more than they do live TV or even many streaming video sites such as Netflix. What kids are also seeing on YouTube (even if it doesn���t consciously register) are all manner of ads located in banner scrolls, sidebars and pop-ups. There���s almost never a time when advertising is not on the screen. Many feature characters similar to the ones that children enjoy on their favorite programs. The difference is, these animated pitchmen are telling kids what to buy.
There are few, if any, age filters on video streaming sites, plus kids circumvent them easily by sharing videos with one another. If you have middle-school children, you probably know how they love to pass along age-inappropriate stuff that they somehow already know about.
As an educator and author in the field of media literacy, I know that no single ad will make middle-schoolers buy a product or become enamored of gratuitous violence and sex. But the constant drip, drip, drip of commercial messages builds up like a stalagmite. Their influence may be firmly planted before parents notice, by which time there may be a lot of bad ideas to undo.
Advertisers know this, too. They���re counting on you being too busy or distracted to notice what your kids are watching. They certainly don���t want you watching alongside them, taking note of the messaging about violence, sex or products that will supposedly make your child happy. My advice: Prove the advertisers wrong.
Nope. Advertising is at least as pervasive, and definitely more insidious, on the web. Kids have shifted from network television to web-viewing, and advertisers have trailed right behind them with Willie Sutton logic���because that���s where the money is.
YouTube is the most popular video streaming site in the world. Kids watch it more than they do live TV or even many streaming video sites such as Netflix. What kids are also seeing on YouTube (even if it doesn���t consciously register) are all manner of ads located in banner scrolls, sidebars and pop-ups. There���s almost never a time when advertising is not on the screen. Many feature characters similar to the ones that children enjoy on their favorite programs. The difference is, these animated pitchmen are telling kids what to buy.
There are few, if any, age filters on video streaming sites, plus kids circumvent them easily by sharing videos with one another. If you have middle-school children, you probably know how they love to pass along age-inappropriate stuff that they somehow already know about.
As an educator and author in the field of media literacy, I know that no single ad will make middle-schoolers buy a product or become enamored of gratuitous violence and sex. But the constant drip, drip, drip of commercial messages builds up like a stalagmite. Their influence may be firmly planted before parents notice, by which time there may be a lot of bad ideas to undo.
Advertisers know this, too. They���re counting on you being too busy or distracted to notice what your kids are watching. They certainly don���t want you watching alongside them, taking note of the messaging about violence, sex or products that will supposedly make your child happy. My advice: Prove the advertisers wrong.
The post YouTube, Your Child appeared first on HumbleDollar.
Seeing Visions
WE SAVE TOO LITTLE, spend too much and what we buy often disappoints. Is there an antidote for this financially self-destructive behavior? One intriguing possibility: visualization.
If you���re like me, the word itself makes you a little queasy. It conjures up images of both self-absorbed, navel-gazing yuppies (not something I aspire to be) and Olympic athletes getting in the zone (not something I���ll ever be). Still, I think there���s value in spending serious time pondering our financial goals.
Visualization is often used to boost confidence, reduce anxiety and take a few mental practice runs before we try something for real. Think about high-pressure situations like making a speech or interviewing for a job. By imagining these events in detail beforehand, we���re likely to perform better when it���s time for the actual thing.
But for financial goals, probably the biggest benefit of visualization is increased motivation. It can help us overcome our hardwired tendency to favor today and shortchange our future self, while also helping us to get a better handle on what we truly want from our money.
The idea is to picture a goal���perhaps it���s retirement, buying a home or switching careers���in as much detail as possible. This doesn���t mean we should spend a lot of time pondering the thrill of achieving our goal. Why not? That, alas, could prove to be demotivating because the vision itself satisfies us emotionally. Indeed, some have argued that instead we should visualize the consequences of failure���because we get more pain from losses than pleasure from gains and thus fear may prove to be a stronger motivator.
Better still, we should spend less time visualizing success or failure, and focus more on the steps we���ll need to take along the way. After all, those steps are the key to getting ahead. If the goal is to buy a home, we might visualize saving up the down payment, getting our other debts under control, improving our credit score, scouting for the right place and so on. This sort of visualization has the potential to stir us to action.
Struggling to paint a full picture because you don���t know much about a topic? You may need to talk to others or read more about your desired goal. As you fill in the details, the goal will become ever more real, its emotional intensity will grow���and you���ll be more motivated to go after it. As psychologist Jennice Vilhauer writes in Psychology Today, ���Being able to do something in your head, greatly increase your chances of being able to do it in real life.���
Folks use all kinds of visualization techniques, such as writing down their goals in great detail, creating a collage of images that bring their goal to life or spending a few minutes each day visualizing what they need to do. But however you go about it, it strikes me that visualizing our financial goals is almost a necessity���because the allure of immediate spending is so powerful.
Thanks to our hunter-gatherer ancestors, we���re hardwired to consume as much as possible today, while giving scant thought to the long term. It���s easy to imagine the fun of a Caribbean vacation or a new Lexus. Nobody needs visualization techniques for that. If saving for retirement or the kid���s college is to have any hope of claiming even a few percent of our paycheck, we need to make these goals at least as enticing as the shiny Lexus, so we���re willing to make the necessary short-term sacrifices.
But this comes with a caveat���one peculiar to financial goals. If a top-notch athlete visualizes hitting a home run or crossing the finish line first, and that comes to pass, there���s little or no downside.
But if we visualize a financial goal and all the steps necessary to make it happen, and we get our wish, it could turn out that the reality simply doesn���t live up to what we visualized. Early retirement turns out to be a bore. The vacation cottage is a horror show of home repairs and extra chores. The new career is even less fulfilling than our old job. The big home in the suburbs turns out to be a commuting nightmare
My advice: If you���re struggling to motivate yourself to save, by all means visualize your goals. But in your daydreaming, give some thought to the potential drawbacks, so you don���t waste thousands of hours and dollars going after a goal you never should have pursued.
Latest Posts
HERE ARE THE SIX other articles published by HumbleDollar this week:
"We don���t actually own anything in this life," contends Joe Kesler. "Rather, we're stewards of what we���ve been given. We need to consider the most effective way we can use our wealth to help others."
Direct indexing is Wall Street's latest, greatest idea. It also has four key drawbacks, says Phil Kernen.
"My bachelor pad was the first to go and it had to go in a hurry, which did not put me in an optimal negotiating position," recounts Tom Sedoric. "I lost around $40,000 selling it to a retiring Tyco executive."
Amid 2020's tumbling stock market, Michael Perry harvested tax losses. His big decision for 2021: What's the best way to use those losses?
"I believe many folks won���t be happy with a life of pure leisure," says Mike Zaccardi. "I suspect even more people will seek some kind of fulfilling work after their main career draws to a close."
Adam Grossman is skeptical of financial planning rules of thumb. Still, he thinks they���re useful for five key questions.
Also be sure to check out the past week's blog posts, including Rick Connor on Social Security's inflation adjustment, Dick Quinn on his disappearing website, John Lim on gold's performance, Kristine Hayes on revamped 401(k) statements��and Dennis Friedman on his favorite day.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier��articles.
If you���re like me, the word itself makes you a little queasy. It conjures up images of both self-absorbed, navel-gazing yuppies (not something I aspire to be) and Olympic athletes getting in the zone (not something I���ll ever be). Still, I think there���s value in spending serious time pondering our financial goals.
Visualization is often used to boost confidence, reduce anxiety and take a few mental practice runs before we try something for real. Think about high-pressure situations like making a speech or interviewing for a job. By imagining these events in detail beforehand, we���re likely to perform better when it���s time for the actual thing.
But for financial goals, probably the biggest benefit of visualization is increased motivation. It can help us overcome our hardwired tendency to favor today and shortchange our future self, while also helping us to get a better handle on what we truly want from our money.
The idea is to picture a goal���perhaps it���s retirement, buying a home or switching careers���in as much detail as possible. This doesn���t mean we should spend a lot of time pondering the thrill of achieving our goal. Why not? That, alas, could prove to be demotivating because the vision itself satisfies us emotionally. Indeed, some have argued that instead we should visualize the consequences of failure���because we get more pain from losses than pleasure from gains and thus fear may prove to be a stronger motivator.
Better still, we should spend less time visualizing success or failure, and focus more on the steps we���ll need to take along the way. After all, those steps are the key to getting ahead. If the goal is to buy a home, we might visualize saving up the down payment, getting our other debts under control, improving our credit score, scouting for the right place and so on. This sort of visualization has the potential to stir us to action.
Struggling to paint a full picture because you don���t know much about a topic? You may need to talk to others or read more about your desired goal. As you fill in the details, the goal will become ever more real, its emotional intensity will grow���and you���ll be more motivated to go after it. As psychologist Jennice Vilhauer writes in Psychology Today, ���Being able to do something in your head, greatly increase your chances of being able to do it in real life.���
Folks use all kinds of visualization techniques, such as writing down their goals in great detail, creating a collage of images that bring their goal to life or spending a few minutes each day visualizing what they need to do. But however you go about it, it strikes me that visualizing our financial goals is almost a necessity���because the allure of immediate spending is so powerful.
Thanks to our hunter-gatherer ancestors, we���re hardwired to consume as much as possible today, while giving scant thought to the long term. It���s easy to imagine the fun of a Caribbean vacation or a new Lexus. Nobody needs visualization techniques for that. If saving for retirement or the kid���s college is to have any hope of claiming even a few percent of our paycheck, we need to make these goals at least as enticing as the shiny Lexus, so we���re willing to make the necessary short-term sacrifices.
But this comes with a caveat���one peculiar to financial goals. If a top-notch athlete visualizes hitting a home run or crossing the finish line first, and that comes to pass, there���s little or no downside.
But if we visualize a financial goal and all the steps necessary to make it happen, and we get our wish, it could turn out that the reality simply doesn���t live up to what we visualized. Early retirement turns out to be a bore. The vacation cottage is a horror show of home repairs and extra chores. The new career is even less fulfilling than our old job. The big home in the suburbs turns out to be a commuting nightmare
My advice: If you���re struggling to motivate yourself to save, by all means visualize your goals. But in your daydreaming, give some thought to the potential drawbacks, so you don���t waste thousands of hours and dollars going after a goal you never should have pursued.
Latest Posts
HERE ARE THE SIX other articles published by HumbleDollar this week:
"We don���t actually own anything in this life," contends Joe Kesler. "Rather, we're stewards of what we���ve been given. We need to consider the most effective way we can use our wealth to help others."
Direct indexing is Wall Street's latest, greatest idea. It also has four key drawbacks, says Phil Kernen.
"My bachelor pad was the first to go and it had to go in a hurry, which did not put me in an optimal negotiating position," recounts Tom Sedoric. "I lost around $40,000 selling it to a retiring Tyco executive."
Amid 2020's tumbling stock market, Michael Perry harvested tax losses. His big decision for 2021: What's the best way to use those losses?
"I believe many folks won���t be happy with a life of pure leisure," says Mike Zaccardi. "I suspect even more people will seek some kind of fulfilling work after their main career draws to a close."
Adam Grossman is skeptical of financial planning rules of thumb. Still, he thinks they���re useful for five key questions.
Also be sure to check out the past week's blog posts, including Rick Connor on Social Security's inflation adjustment, Dick Quinn on his disappearing website, John Lim on gold's performance, Kristine Hayes on revamped 401(k) statements��and Dennis Friedman on his favorite day.
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 Seeing Visions appeared first on HumbleDollar.
August 27, 2021
Losing Ground
IT'S BEEN WIDELY reported that the Social Security Administration will likely announce a roughly 6% cost-of-living adjustment (COLA) for 2022. That would be the largest increase in monthly benefits since 1982, when retirees��� checks climbed 7.4%.
But the impact on retirees is more complicated than you might imagine. Boston College���s Center for Retirement Research recently published a paper entitled, ���The Impact of Inflation on Social Security Benefits.��� The paper investigates three ways that inflation interacts with benefits.
First, each year the Social Security Administration computes a COLA increase��for monthly benefits based on changes in the consumer price index for urban wage earners and clerical workers (CPI-W) over the prior year. The increase is announced in October. Thanks to the recent spike in inflation, 2022���s COLA is expected to be around 6%. That should, in theory, ensure that retirees��� benefits rise with inflation. But it doesn���t quite work out that way.
Why not? That brings us to the second interaction. Medicare Part B premiums are deducted from monthly Social Security payments. Part B premiums increase each year based on the federal government���s per-capita Part B spending. The average annual increase in Part B premiums was 5.9% between 2000 and 2020. During the same period, the average Social Security COLA was 2.2%. The upshot: If inflation drives up Part B premiums faster than benefits go up, retirees��� net Social Security checks can rise more slowly than inflation.
Then there���s the third issue: the tax on Social Security benefits. The IRS taxes benefits over certain thresholds. Those thresholds don���t rise with inflation. That means that, as Social Security benefits and other income received by retirees rise along with inflation, a growing number of retirees see their Social Security benefits taxed. The Center for Retirement Research���s paper notes that, among families receiving Social Security, the percentage paying the Social Security tax has climbed from 8% in 1983 to 56% in 2020. The bottom line: Social Security beneficiaries���despite COLA increases���aren���t fully protected against inflation.
But the impact on retirees is more complicated than you might imagine. Boston College���s Center for Retirement Research recently published a paper entitled, ���The Impact of Inflation on Social Security Benefits.��� The paper investigates three ways that inflation interacts with benefits.
First, each year the Social Security Administration computes a COLA increase��for monthly benefits based on changes in the consumer price index for urban wage earners and clerical workers (CPI-W) over the prior year. The increase is announced in October. Thanks to the recent spike in inflation, 2022���s COLA is expected to be around 6%. That should, in theory, ensure that retirees��� benefits rise with inflation. But it doesn���t quite work out that way.
Why not? That brings us to the second interaction. Medicare Part B premiums are deducted from monthly Social Security payments. Part B premiums increase each year based on the federal government���s per-capita Part B spending. The average annual increase in Part B premiums was 5.9% between 2000 and 2020. During the same period, the average Social Security COLA was 2.2%. The upshot: If inflation drives up Part B premiums faster than benefits go up, retirees��� net Social Security checks can rise more slowly than inflation.
Then there���s the third issue: the tax on Social Security benefits. The IRS taxes benefits over certain thresholds. Those thresholds don���t rise with inflation. That means that, as Social Security benefits and other income received by retirees rise along with inflation, a growing number of retirees see their Social Security benefits taxed. The Center for Retirement Research���s paper notes that, among families receiving Social Security, the percentage paying the Social Security tax has climbed from 8% in 1983 to 56% in 2020. The bottom line: Social Security beneficiaries���despite COLA increases���aren���t fully protected against inflation.
The post Losing Ground appeared first on HumbleDollar.
Worth the Wait
IF SOMEONE ASKS ME what my favorite day is, I���d have to say the second Wednesday of the month. That���s when my Social Security check gets deposited into my checking account. I���ve received three checks so far and each one has been a joy. The experts might be right when they say retirees who have predictable income are happier. At age 70, I feel like a little boy who just got his first bicycle.
I waited a long time for my first check���and it was well worth it:
I now have the best income annuity you can own. Compared to annuities sold by insurance companies, Social Security has better inflation protection, it���s taxed less heavily and there���s less credit risk.
Because I waited until 70, my check is large enough to cover our overhead costs.
That larger check reduces the risk that our investment portfolio will run out prematurely.
We can spend more freely knowing we have a financial backstop in my larger Social Security check.
Delaying my benefits has lowered our taxable income. While I waited to claim Social Security, I was able to do larger Roth conversions, and those mean I���ll have smaller required minimum distributions starting at age 72.
If I die tomorrow, you could argue that I made the wrong decision in delaying Social Security���and you might be right, though my wife will get my benefit as a survivor benefit. On top of that, from a financial point of view, dying tomorrow isn���t my big concern. Instead, what would be more worrisome to me is watching our savings dwindle in our later years���and be left with a smaller Social Security check to fall back on.
I waited a long time for my first check���and it was well worth it:
I now have the best income annuity you can own. Compared to annuities sold by insurance companies, Social Security has better inflation protection, it���s taxed less heavily and there���s less credit risk.
Because I waited until 70, my check is large enough to cover our overhead costs.
That larger check reduces the risk that our investment portfolio will run out prematurely.
We can spend more freely knowing we have a financial backstop in my larger Social Security check.
Delaying my benefits has lowered our taxable income. While I waited to claim Social Security, I was able to do larger Roth conversions, and those mean I���ll have smaller required minimum distributions starting at age 72.
If I die tomorrow, you could argue that I made the wrong decision in delaying Social Security���and you might be right, though my wife will get my benefit as a survivor benefit. On top of that, from a financial point of view, dying tomorrow isn���t my big concern. Instead, what would be more worrisome to me is watching our savings dwindle in our later years���and be left with a smaller Social Security check to fall back on.
The post Worth the Wait appeared first on HumbleDollar.
Life Happens
WHEN I TELL FOLKS that they���ve just met the only guy to lose money on a house in New Castle, New Hampshire, they usually respond with great surprise.
The fact is, in good economic times and bad, it���s hard to lose money on a New Castle home. This quaint New England village���a collection of island connected by causeways���has the honor of having some of the highest-priced homes and lowest property taxes in New Hampshire, thanks in large part to the hefty taxes paid by the village���s best-known establishment, the Wentworth by the Sea hotel and spa.
So how did I lose money? I fell in love.
Before I met my wife Barb, I was on the Henry Higgins path to being a confirmed and happy bachelor. As a successful financial advisor in the early 1990s, I was entering my peak earning years and not averse to buying a house with a substantial mortgage. I think I may have been the only bachelor living in New Castle and���being in my late 30s at the time���most likely brought down the town���s median age significantly.
I bolstered my investment���also known as taking on debt���by adding a bathroom, an office, a den and a master bedroom to the house. I got a dog. I had my sights set on a boat. I had other plans��� and then I met Barb on a blind date.
My bachelor plans began falling by the wayside. Not all at once, mind you, because relationships are always complicated and ours was no exception. We began as supportive friends. She was going through a ���not so fun��� divorce and had two young children, as well as a dog that matched mine. Slowly but surely, a true courtship evolved. In short time, I found myself madly in love. Barb eventually succumbed. We became best buddies first before becoming lifelong partners.
As we tried to combine our complicated lives, we ended up owning three properties simultaneously: her former home in Concord, Massachusetts, my bachelor pad in New Castle, and the house we purchased together to start our lives anew in Rye Beach, New Hampshire. We had been counseled to get rid of ���yours and mine��� and to buy ���ours.��� That was great advice.
My beloved bachelor pad was the first to go and it had to go in a hurry, which did not put me in an optimal negotiating position. I lost around $40,000 selling it to a retiring Tyco executive.
I share this story as an example of how life happens. Despite our best-laid plans, those plans will and do change. Sometimes, economic forces beyond our control challenge us. Sometimes, unexpected family needs take center stage. At other times, we lose sight of our goals and start spending money in amounts that threaten to undermine our long-term plans. All of these life situations take a financial and emotional toll, and the accompanying stress is no joke.
On the flip side, what we do have control over is how we react. It���s at times like this that a financial advisor can prove invaluable, providing not just solace, but also advice on alternative ways forward. When we need to tear up our plans, what matters most is flexibility, honest communication and a willingness to change.
In my case, I���ll never forget that I actually lost money selling real estate in New Castle. But I did eventually get the boat���a used one, that is.
Tom Sedoric is executive managing director of the
Sedoric Group
, a financial advisory firm in Portsmouth, New Hampshire. A Wisconsin native, he loves being on the water, knows some amazing card tricks and can fix just about anything. Tom's previous articles were Kick the Can and��A Combustible Mix.
The fact is, in good economic times and bad, it���s hard to lose money on a New Castle home. This quaint New England village���a collection of island connected by causeways���has the honor of having some of the highest-priced homes and lowest property taxes in New Hampshire, thanks in large part to the hefty taxes paid by the village���s best-known establishment, the Wentworth by the Sea hotel and spa.
So how did I lose money? I fell in love.
Before I met my wife Barb, I was on the Henry Higgins path to being a confirmed and happy bachelor. As a successful financial advisor in the early 1990s, I was entering my peak earning years and not averse to buying a house with a substantial mortgage. I think I may have been the only bachelor living in New Castle and���being in my late 30s at the time���most likely brought down the town���s median age significantly.
I bolstered my investment���also known as taking on debt���by adding a bathroom, an office, a den and a master bedroom to the house. I got a dog. I had my sights set on a boat. I had other plans��� and then I met Barb on a blind date.
My bachelor plans began falling by the wayside. Not all at once, mind you, because relationships are always complicated and ours was no exception. We began as supportive friends. She was going through a ���not so fun��� divorce and had two young children, as well as a dog that matched mine. Slowly but surely, a true courtship evolved. In short time, I found myself madly in love. Barb eventually succumbed. We became best buddies first before becoming lifelong partners.
As we tried to combine our complicated lives, we ended up owning three properties simultaneously: her former home in Concord, Massachusetts, my bachelor pad in New Castle, and the house we purchased together to start our lives anew in Rye Beach, New Hampshire. We had been counseled to get rid of ���yours and mine��� and to buy ���ours.��� That was great advice.
My beloved bachelor pad was the first to go and it had to go in a hurry, which did not put me in an optimal negotiating position. I lost around $40,000 selling it to a retiring Tyco executive.
I share this story as an example of how life happens. Despite our best-laid plans, those plans will and do change. Sometimes, economic forces beyond our control challenge us. Sometimes, unexpected family needs take center stage. At other times, we lose sight of our goals and start spending money in amounts that threaten to undermine our long-term plans. All of these life situations take a financial and emotional toll, and the accompanying stress is no joke.
On the flip side, what we do have control over is how we react. It���s at times like this that a financial advisor can prove invaluable, providing not just solace, but also advice on alternative ways forward. When we need to tear up our plans, what matters most is flexibility, honest communication and a willingness to change.
In my case, I���ll never forget that I actually lost money selling real estate in New Castle. But I did eventually get the boat���a used one, that is.
Tom Sedoric is executive managing director of the
Sedoric Group
, a financial advisory firm in Portsmouth, New Hampshire. A Wisconsin native, he loves being on the water, knows some amazing card tricks and can fix just about anything. Tom's previous articles were Kick the Can and��A Combustible Mix.The post Life Happens appeared first on HumbleDollar.
August 26, 2021
Brace Yourself
PARTICIPANTS IN 401(K) plans will soon be getting estimates of how much income they might receive in retirement if their plan savings were spent purchasing an annuity. Under a new rule, plan providers are required to provide participants with at least two annuity estimates annually on their account statements. One would project the lifetime income from the purchase of a single-life annuity and the other from a joint-and-survivor annuity. A joint-and-survivor annuity extends payments over two lives, typically for a married couple.
I recently came across an article by CNBC that gave this example: Someone with a $125,000 balance in his or her 401(k) would receive $645 per month for life if the money was converted to a single-life annuity. If the same balance was converted to a joint-and-survivor annuity, it would provide $533 per month until the first death, and then that same amount would be paid to the surviving spouse for life. The estimates assume a retirement age of 67, typical longevity and an interest rate based on the current 10-year��Treasury��note yield.
The goal of providing the annuity estimates is to help 401(k) participants see if their accumulated savings can meet their desired income needs in retirement. My guess: Most people will be shocked to find out just how little income they���re estimated to receive.
The question I have is, how will people react when presented with the figures? Will it encourage them to increase their savings rate? Or will it discourage them, prompting them to throw in the towel?
Whichever the case, 401(k) account holders should start seeing the estimates sometime between this fall and fall 2022. The two estimates are required to be provided at least once a year under 2019's��SECURE Act, a federal law which modified many provisions of tax-advantaged retirement savings plans.
I recently came across an article by CNBC that gave this example: Someone with a $125,000 balance in his or her 401(k) would receive $645 per month for life if the money was converted to a single-life annuity. If the same balance was converted to a joint-and-survivor annuity, it would provide $533 per month until the first death, and then that same amount would be paid to the surviving spouse for life. The estimates assume a retirement age of 67, typical longevity and an interest rate based on the current 10-year��Treasury��note yield.
The goal of providing the annuity estimates is to help 401(k) participants see if their accumulated savings can meet their desired income needs in retirement. My guess: Most people will be shocked to find out just how little income they���re estimated to receive.
The question I have is, how will people react when presented with the figures? Will it encourage them to increase their savings rate? Or will it discourage them, prompting them to throw in the towel?
Whichever the case, 401(k) account holders should start seeing the estimates sometime between this fall and fall 2022. The two estimates are required to be provided at least once a year under 2019's��SECURE Act, a federal law which modified many provisions of tax-advantaged retirement savings plans.
The post Brace Yourself appeared first on HumbleDollar.
Playing It Safe
GROWING UP, my older brother beat me in just about every sporting match we played. Basketball, football, tennis���it was remarkable.
I noticed his key to winning was avoiding mistakes. Take tennis. My brother would casually return a soft lob over the net to avoid an unforced error. Meanwhile, I���d pretend I was Andy Roddick and go for the forehand winner every chance I got. My brother would simply watch as my aggressive shot landed outside the lines. Sure, I won now and then. But I shudder to think what my winning percentage was.
My brother���s strategy in sports���trying not to lose rather than trying to win���applies equally well to building wealth, as Charley Ellis notes in his bestselling book, Winning the Loser���s Game. It���s best to stick with tried-and-true methods. Invest automatically in your 401(k) and Roth IRA. Buy low-cost, diversified funds.
Admittedly, it���s easy to get bored with this approach amid today���s frenzied world of social media and nonstop financial TV. If you���re so inclined, you might try for a few high-risk winners with a small part of your portfolio. But realize that���s more likely to hurt your investment performance than help it.
Considering a high-risk strategy? Thinking about buying exotic alternative investments? The reality is, you���re much better off playing the percentages with plain-vanilla, low-cost stock and bond funds���because that���s the road that���s most likely to lead to long-term grand slam investment results.
I noticed his key to winning was avoiding mistakes. Take tennis. My brother would casually return a soft lob over the net to avoid an unforced error. Meanwhile, I���d pretend I was Andy Roddick and go for the forehand winner every chance I got. My brother would simply watch as my aggressive shot landed outside the lines. Sure, I won now and then. But I shudder to think what my winning percentage was.
My brother���s strategy in sports���trying not to lose rather than trying to win���applies equally well to building wealth, as Charley Ellis notes in his bestselling book, Winning the Loser���s Game. It���s best to stick with tried-and-true methods. Invest automatically in your 401(k) and Roth IRA. Buy low-cost, diversified funds.
Admittedly, it���s easy to get bored with this approach amid today���s frenzied world of social media and nonstop financial TV. If you���re so inclined, you might try for a few high-risk winners with a small part of your portfolio. But realize that���s more likely to hurt your investment performance than help it.
Considering a high-risk strategy? Thinking about buying exotic alternative investments? The reality is, you���re much better off playing the percentages with plain-vanilla, low-cost stock and bond funds���because that���s the road that���s most likely to lead to long-term grand slam investment results.
The post Playing It Safe appeared first on HumbleDollar.
