Jonathan Clements's Blog, page 273
August 19, 2021
Six That Count
No. 1: Retirement savings. Add up all your retirement account balances and divide by 25. This will give you an estimate of what you can safely withdraw from savings in your first year of retirement.
No. 2: Social Security benefit.��To your projected income from your nest egg, add your estimated Social Security benefit and any other retirement income you���ll likely receive. That'll give you a handle on your annual retirement income. Is this enough to support your desired retirement lifestyle? If not, once retired, you may need to find a part-time job or reduce your spending.
No. 3: Credit score. Your score is based on your borrowing history and reflects the likelihood that you���ll repay your debts. Your FICO credit score can range from 300 to 850. Why is it so important? If you want to rent a home, get better terms on loan products, get the best credit cards, and qualify for lower homeowner���s and auto insurance premiums, you need a good score.
Nos. 4, 5 and 6: Blood pressure, cholesterol and blood sugar levels. High blood pressure (hypertension), hardening of the arteries and diabetes are known as silent killers because you can have these conditions and not know it. They don���t usually cause any symptoms until they���ve done damage to crucial organs such as your heart, brain, kidneys, eyes and blood vessels. The best way to guard against these insidious diseases is to see your doctor regularly to have your blood pressure, cholesterol and blood sugar levels checked.
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Padding the Mattress
CAN YOU EVER HAVE enough? Yes, I���m talking about money.
But I���m not some gazillionaire burning up billions on a rocket to space. I���m talking about emergency savings for ordinary people. A cash stash. Rainy-day funds. Mattress money.
I thought I had enough a few months ago, but then life happened. Dental work. A blown clutch. More support for my son, who has a great job offer but won���t start work until later this year. Boom, a big chunk of my savings was gone and, for now, it���s not growing back.
Experts say you should keep between three and six months of living expenses in a safe place, free from the vagaries of the stock and bond markets. You can stash the cash in a savings account at a local bank (yielding little more than your mattress), certificates of deposit, saving bonds from the U.S. Treasury or in an online savings account that won���t yield much (but still many times more than your brick-and-mortar bank will pay you).
I can���t bring myself to tie up money in CDs and savings bonds, partly because I may need the money suddenly. Instead, I���m partial to the liquidity of my FDIC-insured online savings account. It���s with Ally Bank, yielding about 0.50%, but there are other providers. You can compare their rates here.
One thing I like about online savings accounts is that I can put my money in buckets���segregated pools that I can designate for certain purposes. I have one for my daughter���s wedding. It isn���t enough to cover a decent reception���yet. But that���s okay, because she���s not engaged and might not be for years. I don���t count that money as part of my emergency fund because I���m determined never to tap it except for her big occasion. But I haven���t been able to add to it lately.
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I have another bucket dedicated to what I hope can be a hefty down payment on my next car. I do count this money as part of my emergency savings. But when I spend from this bucket, my rainy-day fund will be smaller and in need of even more rebuilding. My plan is to make a large down payment on my next car, thereby reducing my monthly car payments.
I���m hesitant, as an amateur, to say the experts are wrong about how much you need for emergencies. They typically suggest having three-to-six months��� worth of your fixed expenses saved up. But they���re wrong.
Three months��� worth of expenses is absolutely nowhere near enough. After I got laid off in 2009, it took me nine months to find a good job. Six months of savings is a better rule of thumb. Except that when unexpected expenses do occur, you might be right back to having just three months��� worth of savings left.
What if surprise expenses creep up on you���and shortly after that you lose your job? That kind of scenario may be unlikely, but it���s exactly what we should be prepared for. Nine months of expenses is my new savings target. I am only about halfway there. I had six months��� worth back in May, before the clutch, the dental work and the additional financial needs of my live-at-home college graduate. I just turned 60, so this would be a bad time to lose my job.
On top of that, when my son does begin office work, he���ll need a car. Car prices have lately gone pedal to the metal. I may give him my car, a 2014 Volkswagen Jetta, or sell it to him for a couple of thousand dollars. Either way, I���ll need another car for myself before long. I���ll probably have to tap that car savings bucket, leaving me with even less for an emergency.
At some point, I���d like to travel again. If my emergency funds were healthy, I���d be able to consider a nice trip. But a vacation involving airline tickets and hotel stays is out of the question for now.
A first-world problem? For sure. How can I complain when the stock funds in my IRA are up so much? But don���t forget, the market could turn on a dime and my account could lose value. That���s another good reason to stockpile cash.
Can I ever have enough?
William Ehart is a journalist in the Washington, D.C., area. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart��and check out his earlier articles.
The post Padding the Mattress appeared first on HumbleDollar.
August 18, 2021
Quaint at a Cost
Up here, the rural past seems close at hand. The artist Andrew Wyeth painted one peninsula over. His depiction of the Olson farm perfectly captured the rustic ideal. Christina Olson and her brother Alvaro sold vegetables out of their kitchen door. Their 18th century clapboard home decayed picturesquely around them. They couldn���t afford paint or to replace the cast-iron stove with something more up to date. It made a great setting for paintings.
Around the same time, E.B. White wrote from a picturesque old farm in Brooklin, also in Mid-Coast Maine. He celebrated the quiet life in articles for The New Yorker and in popular children���s books like Charlotte���s Web. Rural Maine became a celebrated ideal in popular culture, and people like my parents left the din of Manhattan every summer to vacation in peaceful Maine.
Until recently, I hadn���t realized that the main ingredient in Maine���s rustic charm was poverty. Practically every Maine industry crashed in the late 19th or early 20th century. Small farms couldn���t compete with the big spreads on the Plains. Lumber companies left Maine for Georgia, where the pines grow faster and straighter. The block ice business was wiped out by mechanical refrigeration. Thanks to overfishing, the lobster, cod and salmon catches all crashed at various times.
Shipbuilding had been a mainstay of coastal communities. The business fell apart in the transition from sail to steam. Nearby Waldoboro gave it one last try, building enormous five-masted wooden cargo ships. They foundered in far-off seas when the deckhands couldn���t haul in the sails fast enough when a storm blew up.
When the Great Depression arrived in 1929, it didn���t scar Maine, as it did other places. ���Maine���s coastal economy had been in decline for so long that it had nowhere left to fall,��� writes historian Colin Woodward. ���Many Mainers, especially in rural areas, were already as depressed as they could get.���
No one tore down an old house to build a new subdivision. ���Make It, Make Do or Do Without��� was stitched on samplers. Because she lacked cash, the woman who owned our farmhouse paid the local boy who cut her lawn in the 1930s with delicious homemade pies. If a windowpane broke, it might be stuffed with a rag. Old wooden boats lay in fields all about. Who knows? Maybe they could be caulked for one more season.
There���s a magnificent��sea captain's house open for tours in nearby Wiscasset, which bills itself as the prettiest little village in Maine. The man who built the house in 1807 went bankrupt shortly thereafter. President Thomas Jefferson imposed a trade embargo with all foreign nations in December 1807. It devastated the sea trade, the house guide explained, and the town has never recovered. Which is why it still looks quaint and charming in every direction.
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Quick and Easy
DON���T YOU LOVE those online calculators that, with just a touch of your screen, will tell you whether your retirement plan will be successful or not? I especially like it when I can pick the rate of return on my investments. Who knew that, if you assume an annual return of 40%, you could save less and retire sooner?
I just tried a FIRE (financial independence/retire early) calculator, designed for those who want to save aggressively and retire at a young age. Amazingly, no matter what assumptions I chose���retirement age, investment returns and so on���the retirement nest egg I needed was equal to 25 times my assumed annual retirement expenses. Customized estimate? Not exactly.
When I watch YouTube videos on retirement planning���and there are many���I���m fascinated by some of their assumptions. For instance, one video says your nest egg needs to generate retirement income equal to your expenses. But what about the portion of your retirement expenses covered by Social Security? Another suggests that a 4% draw on a $1 million nest egg will cover $40,000 in living expenses, but it doesn���t mention any taxes owed on the withdrawal.
Assumptions about living expense are another slippery slope. What matters isn���t those fixed expenses you must cover in retirement. Instead, it���s your total spending. The way I see it, it���s discretionary spending that can make retirement so much more enjoyable.
Then there are other generalizations that can lead to trouble. Like the suggestion to save 10% of your income for retirement. Chances are, 10% won���t leave you with the nest egg you���ll need.
It seems to me we���re mired between two extremes: There are many who do no planning and rely on a seat-of-the-pants strategy, and there are others who are overly optimistic based on quick-and-dirty calculations. Rather than relying on easy answers or someone else���s assumptions, I suggest a realistic review of every factor that could affect your retirement, so you have a better handle on the age at which you can retire.
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Teaching Teachers
���That can���t be true,��� they say. ���The district wouldn���t allow this. The union wouldn���t allow this. Everyone I know uses that company. Is everyone I know getting a raw deal?���
Yes, they are.
A simple scenario illustrates the problem. Consider Sarah, age 25, who was just hired as a high school science teacher. She lives in New Jersey, where starting salaries for teachers tend to be around $50,000 annually and she can anticipate a 1.5% raise each year. Sarah plans on working until age 65, when she���ll have earned her full pension.
Sarah is committed to investing 5% of her salary every year. Let���s assume her investments, a combination of stocks and bonds, will return 7% annually. Sarah signed up for a 12-year variable annuity contract with an insurance company, a typical choice in 403(b) plans. The mortality and expense fee is 1.2% and the average expense ratio is 1%, for total annual fees of 2.2%.
At the end of her 40-year career, Sarah could have earned $582,986 without the fees. Instead, due to the 2.2% in fees, she���ll end up with $339,747, a loss of $243,239, or 42% of her potential account value. That���s astonishing���and completely avoidable in most cases.
This calculation was done using a 403(b) retirement��calculator from Bankrate.com and taking one of the largest players in the 403(b) market as my example. This company offers just one product to kindergarten through high school teachers, a variable annuity contract with a surrender charge that applies if you sell in the first 12 years. The average expense ratio was found on 403bcompare.com, an excellent resource for finding 403(b) fees.
Let���s examine why teachers aren���t doing better. For starters, the school district 403(b) world is the last true wild west of investments. Most districts can have anywhere from a few 403(b) vendors to more than 20. Compare that with 401(k) plans, in which companies typically choose one vendor, such as Fidelity Investments or Vanguard Group.
Insurance companies dominate the 403(b) market. In many schools, company representatives are allowed to attend faculty meetings, set up shop in faculty lounges and even walk into classrooms during prep periods, all in an attempt to sign up teachers for high-fee variable annuities. These products typically provide the salesperson with a nice signup bonus and a steady stream of monthly income, assuming the teacher continues to contribute.
I don���t blame salespeople for trying to do their job and provide for their families. I do, however, believe that school districts and unions need to take a stronger stand and more active role in educating teachers about what to look for in a 403(b).
What can a teacher do? Don���t simply sign up with the person in the faculty lounge telling you that your pension is in grave danger. Know who your 403(b) vendors are. Most school districts have at least one low-cost vendor.
Vanguard, for example, is committing more time and resources to expanding its 403(b) programs. T. Rowe Price, Fidelity and Aspire Financial also have excellent options that are available in many districts. But you may never know they���re available. Those companies don���t use salespeople to promote their products. They���ll never come to your school. Among other 403(b) options, Security Benefit and Lincoln Investments both offer teachers the opportunity to invest in Vanguard mutual funds.
Going back to Sarah, if she���d gone with Vanguard, she could easily build a portfolio of mutual funds with total expenses of 0.2% or less. Then she���d end up after 40 years with $554,235, or $214,488 more than with the high-cost annuity.
The bottom line: The school district 403(b) business is designed to make money from teachers, not for them. You have the ability to pay less in fees, which is one of the keys to successful investing and something you can control. If you don���t have at least one low-cost vendor available in your district, don���t settle. Talk to your union and make this an issue. School districts can easily add new vendors and it doesn���t cost the district a dime. Teachers deserve better, but we won���t get better 403(b) vendors and education unless we demand it.
Chris Nye is a high school business education teacher in Jackson, New Jersey. He also owns and operates his own registered investment advisor,
403b Solutions, LLC
. Chris has been educating teachers about 403(b) plans for years, and has helped school districts and unions get better 403(b) options.The post Teaching Teachers appeared first on HumbleDollar.
August 17, 2021
Three Thoughts
1. What���s measurable isn���t always meaningful. It���s easy to get tunnel vision when it comes to our personal finances. We���along with our financial advisors���tend to focus on the size of our 401(k) or our net worth, in part because these are easy to measure. I���m not saying these are unimportant metrics. They are indeed crucial indicators of financial health.
I wonder, however, whether we ought to think more about how we spend our money and the pleasure we derive from our expenditures. These are fuzzier notions but no less important. New York Times columnist Carl Richards urges us to take a few seconds before, during or after buying something to simply ponder the transaction. Without making a judgment, we should say to ourselves, "Isn���t that interesting?" The goal: Raise awareness of how we spend.
2. Wealth is subject to diminishing returns. The concept of diminishing returns is one of the more practical ideas in economics. The premise: Increasing wealth leads to increasing utility (happiness) but at a diminishing rate. A $5,000 bonus moves the happiness needle far more when we earn $50,000 than when we earn $250,000. At a certain threshold of wealth, additional income may pad our 401(k) without leading to any real change in our happiness.
Increasing our income, however, has an opportunity cost that���s measured in time and ���sweat.��� The irony of accruing great wealth: Those who do so often have far less time and energy to enjoy its fruits. Up until three years ago, I worked in a high-powered physician group that exemplified this tradeoff. While I was highly compensated, my job exacted a large toll in terms of time, energy and psychological well-being. One day I had an epiphany: I would likely never spend all the wealth I had attained. I had reached the point of diminishing���and perhaps zero���returns to greater wealth.
3. Hedonic adaptation is the Achilles heel of materialism. A great lie has been propagated by our culture of materialism. What lie? Having more stuff will lead to greater fulfillment. The truth is, humans are highly adaptable creatures, which can be an amazing asset. Paraplegics, for example, spend far less time in a bad mood than most people would presume.
But this adaptability is a double-edged sword. It means we also suffer from hedonic adaptation���that is, we adapt rapidly to pleasurable stimuli. We���re all familiar with this phenomenon. New retirees imagine that hitting the golf course every day will be paradise on earth, only to discover they���re bored after a few months. A child pines for a new bicycle for Christmas. By March, it sits in the garage unused.
The research on hedonic adaptation and happiness is clear. Having more stuff does not make us happier. But sharing experiences with loved ones not only brings us joy, but also fosters greater well-being. Even better, such experiences are often free or involve minimal expense.
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Catastrophic Care
One of our cats, Sangria, seemed to have no energy for several days. Part Siamese, she���s usually a loud crier. But lately she���d taken to quietly hiding in a closet. My wife Jiab���the cat attendant responsible for intake���reported her eating as normal. I, in charge of the litter box, noticed that outflow was a bit irregular. We thought it would pass. But after a couple of days, we decided to take her to the vet to make sure.
We���ve used the same vet office for more than 20 years, and we love all the vets. Unfortunately, they were on vacation. We met with a fill-in vet���we���ll call her Dr. FIV���whom we didn���t know.
Dr. FIV did a cursory look-over. No temperature. Things seemed normal. To help Dr. FIV be thorough and narrow down the possible causes, I mentioned that Sangria had been eating a lot of the house plants. But I also explained that Jiab is meticulous about researching our plants to make sure they aren���t toxic.
Dr. FIV, however, latched on to the possibility of poison and wouldn���t let go. She said Sangria could drop dead that night. She recommended bloodwork, as well as injecting liquid in Sangria that would flush her out. Total cost? Just over $300.
If we knew Sangria was possibly dying, absolutely. But what do you do when you feel it���s a bogus diagnosis that���ll cost hundreds of dollars? We didn���t want to take her to another vet we didn���t know, only to pay for another office visit. Do we risk her health? Do we pay?
If you���re a pet owner, you already know the answer.
One of our regular vets called the next day. He said the bloodwork didn���t reveal plant toxins. Sangria, meanwhile, was soon back to her singing-and-chasing-paper-balls Siamese self.
Average annual U.S. pet expenses are in the thousands of dollars. There is pet insurance. We pay $300 a year for our two cats, but that only kicks in for big costs like operations. What costs should pet owners be prepared to pay? It���s a tough call���until you look into those blue eyes of your Siamese, saying something is off. Then there���s only one choice.
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Learning to Spend
Every morning this past week, I���ve intended to pay the first semester for the twin who didn���t get a full ride. I have the cash. It���s earmarked, as is money for subsequent semesters. I���ve been saving for more than a decade. Neither student received grants from federal or state sources because my federally calculated expected family contribution (EFC) is high. The sum I have to pay is about half the EFC because my daughters were careful in choosing and applying to colleges.
Still, the payment is larger than anything I���ve ever previously paid for, except the homes I���ve lived in. The actual dollar amount is so large compared to the way I typically spend that it takes my breath away. The school offers a monthly payment plan���to ease the shock, I suppose. But I intend to pay in full, just as when I paid off the house and my car.
Following the school���s instructions, I initiated the tuition payment online. But I couldn���t push the ���confirm transaction��� button on the screen. My finger hovered���and failed. Several times. My solution was to give the task to my student. I said she would have to press the button. Her first semester at college hung in the balance.
It was nice that the screen displayed the exact dollar amount. It showed my precise contribution to support her higher education, the foundation for her becoming an adult and being prepared for future career opportunities. Her finger also hovered for a few seconds and then���bingo���the deed was done.
���I have to sit down now,��� she said, somewhat overcome by what she had done and the cost of her higher education.
I can���t believe how much relief I feel having paid this semester���s tuition. I���m not certain whether my daughter will be there for one semester or many, but now I know I have it within me to occasionally spend big and according to plan. After decades of work and saving, my discretionary spending muscles are sorely underdeveloped. I can loosen my grip slightly.
There are other big checks I may write in future years. Maybe I���ll buy a single premium immediate annuity with a long-term-care rider. A few years from now, I may offer to help with a down payment on a home for one of my kids. Maybe once the twins��� younger brother turns age 18, I���ll want to travel around the world or take up a new, expensive hobby. I might want to underwrite a chair at a university. As long as it���s only in my imagination, I can find many different ways to spend lots of money.
Here are three additional reflections on paying for the first semester:
���Nothing matters until money changes hands,��� as the saying goes. Assuring the twins that I���d cover the cost of college is completely different from actually paying for it.
The kids are aware that the dollars I spend on each one won���t be exactly equal from this point forward, even as I provide equal opportunities to pursue their educational aspirations. I wonder how to handle this potential inequity over the long term. Maybe one will need help paying for graduate school but not the other. Perhaps in 10 years, if I sense envy, hurt or resentment, or I believe someone has been shortchanged, I can amend my will. Meanwhile, I���ve found a way to demonstrate the economic concept of an indifference curve. We create a satisfying division of goods and services in our home through negotiation and dialogue, not via a precise allocation of assets.
Looking over the growth of my portfolio while saving for college, I realize that cash and bonds don���t grow much more than inflation. If I save using only conservative investments, I must plan to save 100% of the money I���ll need for the future. But when I can tolerate more risk and portfolio volatility, and put savings into stocks, I might get by saving 50% or less of the money I���ll ultimately require.
Catherine Horiuchi recently retired from��the University of San Francisco's School of Management, where she was an associate professor teaching graduate courses in public policy, public finance and government technology. Check out Catherine's earlier articles.The post Learning to Spend appeared first on HumbleDollar.
August 16, 2021
Doesn���t Apply to Me
I had no idea how prevalent that attitude was���until recently. It seems some hospitals and drug companies also feel that the rules don���t apply to them.
There have been articles in The Wall Street JournaI about a new rule that went into effect requiring hospitals to show how much they charge for procedures. Many have chosen to ignore the rule, while others have complied, but made it next to impossible to find the information on their website.
Similarly, in what Chemical and Engineering News calls ���an unprecedented action,��� Acceleron Pharma has decided that the rules for clinical trials don���t apply to the company. Its results from a trial are overdue by three years and the U.S. Food and Drug Administration is threatening fines.
What���s going on here? It seems more and more people are deciding the rules don���t apply to them. What if we all started behaving that way?
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Coin Collecting
One of the first towns I���d get to was Rockdale, which was best known for having a big Alcoa aluminum factory. I haven���t passed that way in decades, so I guess my memory of it was frozen in time and I somehow assumed it was much the same as before.
Then I came upon an article in The Washington Post about bitcoin mining in Rockdale. What an eye opener. My home state of Texas is known for many things. But "one of the go-to locations for expanding crypto entrepreneurs the world over"? That was news to me.
I confess I know almost nothing about bitcoin���and have an instinctive suspicion of it. Still, what a surprise to read that the old Alcoa plant is now home to more than 100,000 computer servers, stacked 20-feet high, dedicated to creating bitcoin.
Perhaps most surprising of all is that one of the attractions of Texas for bitcoin-mining companies is our deregulated electric grid, where customers can choose their own provider. The bitcoin companies have even worked out a deal where they get paid to shut down operations during periods of peak electricity demand. When I think about the historic Texas freeze back in February, and all the misery it caused, somehow it���s no consolation that during that time the bitcoin miners took a break from mining���and got paid to do so.
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