Jonathan Clements's Blog, page 275
August 12, 2021
Happy to Be Home
Fortunately, I���ve discovered that I prefer living in a smaller home. I love the design of Spanish houses, which are���on average���just half the size of equivalent U.S. homes. Because most Spanish homes don���t have central air conditioning, all of our Spanish casas had lots of windows for cross-breezes. This also provided natural light from multiple directions. Each place had at least one outdoor terrace.
When we returned to the U.S., we lived in a condo for four months. We were waiting for our tenant���s lease to end on the townhome we own. The condo had plenty of space, about 1,200 square feet. But I just didn���t care for the layout. It lacked a terrace or patio, and the light and air came in only from the south side. The windows could be opened, but just barely.
When we finally moved back into our Dallas townhome a few weeks ago, I realized that it has the qualities that we loved in our Spanish apartments. It gets lots of light from multiple directions. It has a private courtyard, so we can leave the doors open for some fresh air. It has places for plants to thrive, including the kitchen window sills. There���s even a small cat door, so our pets can frolic in the courtyard at night, chasing bugs and rolling in catnip.
Having been away, we fell in love with our first home all over again.
Voltaire writes of travelers who, after seeing much of the world, decide that perhaps the best thing they can do is cultivate their own garden. Jim and I are doing exactly that, with some help from the cats.
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After the Birth
For new parents, the first step is to obtain two basic documents that���ll last a lifetime: a birth certificate and Social Security card. The hospital will start the process, but you need to be diligent. Is the name spelled correctly? Are birth dates and other data correct? A mistake now will cause problems later. Also, decide where to file these documents so you can find them when they���re needed.
Next, check in with your employer���s human resources department to make sure important benefits are in place:
Health-care coverage is essential. Although insurance companies have a grace period, you should add the newborn immediately after birth. Health issues in newborns can arise quickly and you don���t want to worry about coverage during a crisis. Make sure to add the baby to dental and vision insurance. Later verify everything with each insurance company. My daughter realized only at the time of her daughter���s first dentist visit that she hadn���t been added for dental coverage.
If you���ll be paying for childcare, ask if your employer offers pretax payroll deductions to cover dependent care costs. Settling on the right amount requires some planning, because money contributed must be spent within a defined time frame. But depending on your tax bracket, the savings can be substantial.
Check the beneficiaries on your life insurance and retirement plans. If your spouse is the primary beneficiary, it may be useful to list the contingent beneficiary as ���all my children, per stirpes,��� even if you currently have just one child. If you forget to review this after future births, it ensures that benefits will flow to all children equally. If you have a trust, or have prepared documents for a trust to be created in the event of your death, an attorney can advise you on how to designate the trust as a beneficiary.
Once all that���s done, consider getting life��and disability insurance beyond what���s offered at work. Remember, employment-based insurance disappears if you lose your job. In addition, revise��wills and other estate-planning documents. Consider who will be guardian for your children if something happens to you and your spouse.
Keep in mind that identity theft isn���t just an adult problem. Minimize who sees the baby���s Social Security number. Almost every intake form for doctors��� offices or health facilities asks for it. They don���t need it. You can leave it blank. Consider freezing the baby���s credit. A child���s identity can be coopted to open accounts without your knowledge. Only years later, when trying to get a loan, will the child learn his or her credit rating has been compromised. All three credit-reporting agencies have a process for a parent to freeze a minor���s credit. Save the information needed to unfreeze your child���s credit until he or she applies for credit���which could be in 18 years or more.
Like the parents, grandparents should make sure their estate will go where they intend. Review the beneficiaries listed in wills, trusts, insurance policies, and other key documents and financial accounts.
Given the steep cost of higher education, 529 plans can offer a good way to build a college fund, with earnings growing tax-free. But some states��� plans are loaded with high costs and poor investment options. There���s no requirement to use the plan offered by your state. If your grandkids live in another state, there���s also no reason you shouldn���t open an account in your own state to take advantage of a state tax benefit for contributions. Just remember that state tax benefits may not offset poor plan design. Morningstar���s annual ranking can help you find the best plans.
You may have read that a 529 balance counts against a student���s ability to get financial aid. It���s true that if the account is owned by the parents, the entire balance must be declared as an asset. But if the account is owned by the grandparents, typically only the distributions come into play���and you may be able to avoid financial-aid problems by using the 529 to pay college costs after the final financial-aid application is filed.
We use a ���defined contribution��� approach to 529 accounts for our six grandchildren, currently ages one to 10. Each grandchild gets an account at birth with a moderately large initial deposit. We then make an automatic monthly contribution from our checking account to take advantage of dollar-cost averaging. Each birthday, in addition to the monthly deposit, we make a separate payment equal to double the monthly contribution. We intend to continue this until each child���s 18th birthday. In the event my wife and I don���t live that long, our trust document instructs future trustees to continue the process so all six are treated equally.
One caveat: In your excitement to help your first grandchild, be careful about the precedent you set. What you do for the first grandchild should be affordable for future births���and you don���t know how many there���ll be. My advice: Start with a manageable sum, knowing you can always increase contributions later.
Howard Rohleder, a former chief executive of a community hospital, retired early after more than 30 years in hospital administration. His previous article was Helping Mom and Dad. In retirement, Howard enjoys serving on several nonprofit boards, exploring walking paths with his wife Susan, and visiting their six grandchildren. A little-known fact: In May 1994, he was featured���along with five others���on the cover of Kiplinger���s Personal Finance for an article titled ���Secrets of My Investment Success.���The post After the Birth appeared first on HumbleDollar.
August 11, 2021
Going Nowhere
When I was going to school, I was never good at math. In fact, I needed a tutor to get through algebra. But I know enough to calculate that���for the price of our house���we could move to another state, buy a nice home, plus a vacation home, plus a Range Rover for the garage.
It���s very tempting, especially when I climb those 18 steps on my way to bed each evening. If we asked a financial advisor, he or she would probably tell us to put the for-sale sign out front and start packing our bags.
But my wife and I have no intention of moving to another state with a lower cost of living. We've learned that retirement living isn���t just about how much money and stuff we have. It���s more than that. It���s about whether you enjoy your life. That���s the question you should be asking yourself before you make any major life-changing decision. It���s the true test of whether your retirement is on the right track.
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Bucket List
WHEN YOU���VE BEEN saving and investing for a long time, you have a long list of things you wish you could do over. Like hanging on to Apple, instead of selling at $85 a share. Like buying an index fund, instead of that hot mutual fund that quickly turned cold. My wife calls these ���what ifs.��� We have a rule not to talk about them because they almost always lead to arguments about who was wrong.
Of course, there are also ���what ifs��� on the positive side. What if we sold everything when the market crashed in 2000-02, 2007-09 and 2020? What if we hadn���t started saving in our 401(k) plans when we got married? What if I hadn���t chosen to leave corporate America to see the country in an RV and later entered seminary?
My most positive ���what if��� these days is this: What if I hadn���t become a devotee of the bucket approach to retirement allocation in the past five years? Most of our negative financial ���what ifs��� happened when we forgot when we were going to need our money. Selling stocks or mutual funds just because they go up or down is foolish, especially when retirement is 10 or 20 years away. Kathleen and I were foolish a lot over the years, usually when the market boomed or busted.
Discovering the bucket approach a few years ago has provided much more peace and financial serenity in our lives. We park two years of cash in certificates of deposit and savings accounts. Money for years three through seven goes into bonds and very-low risk mutual funds. Anything we won���t need for at least seven years is in stocks. Last year, when the stock market briefly crashed, I was���for the first time in my life���calm and serene because I knew we���d be okay for at least seven years.
I���m not sure we can ever eliminate all the financial ���what ifs��� in our lives. But figuring out how to have fewer of them can free us up to do more fun things���the things on our other bucket list.
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Not a Capital Idea
Everyone growing up in the U.S. is told of these ideals. We are sharks who must keep moving to survive. The only acceptable direction is up. We do it for ourselves, believing happiness is just over the next hill of ���more.��� We do it for our family because providing is an act of caring.
If there���s a least-debated rule in economics, however, it's that everything comes at a cost. This is especially true for the resources needed for production, whether of a thing or our own careers. The scarcest resource of all? Time. No more is being made. It���s the short tablecloth with which we try to cover everything we want done.
In racing to the top, people turn themselves into human capital, another resource to self-exploit. They drive themselves with demands for more productivity. If such demands were made by our boss, we would go on strike. But coming from ourselves, we forgo taking time off, will work when sick and sometimes even sacrifice time with family, all out of fear we���ll fall two steps behind the other guy, who���s also running exhausted and bleary-eyed.
I was waiting for my son to finish Sunday school one morning when another waiting dad, looking at his phone, yelled out an expletive. At 3 a.m. the night before, a competitor for a business account sent an email, so the dad was now saying he���d have to dedicate the rest of the day to responding.
I know this is a problem for the privileged���those lucky enough to be in semi-control���and I know entrepreneurship drives the economy. But at what cost? Isn���t quality of life worth more than stuff? When does ���more��� become "enough"?
During our three years in Spain, I remember how rush hour was at 2:30 p.m., when parents picked up their children from school and entire families then lunched together. There are few, if any, drive-through gulp-and-go eateries. If an American showed off his spacious house, with its amenities of grand living, chances are Spaniards would wish the American good luck with it, while they happily gathered at a caf�� or park with neighbors who���on average���live in homes half the U.S. size.
We say that this is our choice, but is it? Virtually every executive I know can recount all the times they had no choice but to give up something, and that was usually family or mental-health time. Most retirees will tell you they don���t regret devoting more time to work, but they do regret the time they didn���t give to their family.
I���m not anti-entrepreneurship and certainly not anti-American. I���m pro-balance. My best family memories are not from when my parents were away working, but when we did the smallest things���together. My suggestion: We should all consider doing less for the ones we love and more with the ones we love.
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Left Alone
1. Social Security. For a married couple, their Social Security benefits can consist of two workers��� benefits or a worker���s benefit and a spousal benefit. On the death of either spouse, the remaining benefit is the higher of the two benefits. For instance, if a worker had a $2,000-a-month benefit and the spouse had $1,000, upon the death of either spouse the survivor���s benefit would be $2,000 a month.
What if the surviving spouse isn���t yet age 62, which is usually the earliest age at which you can get retirement benefits? There���s the possibility of claiming as early as age 60. The surviving spouse can choose to collect either survivor benefits at age 60 or his or her own benefit as early as age 62. If the surviving spouse takes the latter option, he or she can postpone survivor benefits, leaving the monthly amount to increase up until his or her full Social Security retirement age of 66 or 67. The reverse strategy is also possible���claiming survivor benefits first and then later swapping to the spouse���s own benefit.
2. Pension benefits. The two most common pension payouts are ���single life��� and ���joint and survivor.��� Many couples choose the lower joint-and-survivor payout so that, upon the death of the worker, the income for the surviving spouse doesn���t decline. If ���single life��� is chosen and the worker dies first, the surviving spouse could potentially lose all pension income. Because the consequences of opting for ���single life��� are so severe, the spouse must typically give written approval and get his or her signature notarized.
3. Income annuities. Since immediate��annuities are a type of pension, choosing ���single life��� or ���joint and survivor��� has similar consequences.
4. Life insurance. Financial planners often say life insurance is unnecessary if there are no longer children at home or once a couple is retired. But some retirees opt to keep their life insurance so they have a pool of tax-free assets to back up their pension or annuity choices. For instance, the spouse with a pension might choose the higher ���life only��� payout and then hedge the risk by purchasing life insurance on his or her own life. What if the other spouse dies first? At that juncture, the surviving spouse might opt to avoid future premiums by canceling the life insurance policy.
5. Tax rate differences. On the same total taxable income, married couples are taxed less severely than single taxpayers. Similarly, the standard deduction for married couples is double that for single filers. The upshot: If one spouse dies but the household income remains the same, the surviving spouse might face much steeper tax bills.
6. Medicare. Basic Medicare premiums are charged per person, so the death of one spouse leaves the surviving spouse paying the same premium. Still, the survivor could end up paying far more thanks to IRMAA, or income-related monthly adjustment amount, which is the Medicare surcharge levied on those with higher incomes. In 2021, IRMAA kicks in at $176,000 in modified adjusted gross income for married couples, but just $88,000 for single individuals.
It may be impossible to avoid IRMAA surcharges���which can range from $860.40 to $5,502 a year in combined extra premiums for Medicare Part B and Part D���if the surviving spouse is left with a large sum in traditional retirement accounts and is taking required minimum distributions. One piece of good news: Withdrawals from Roth accounts aren���t included in the IRMAA calculation.
7. IRAs. Surviving spouses can roll their deceased spouse���s retirement account into their own IRA, assuming they���re listed as the account���s beneficiary. But that isn���t necessarily the best strategy: If the surviving spouse is younger than age 59��, he or she should probably treat the account as an inherited IRA. That way, the surviving spouse will have the flexibility to withdraw assets without paying the 10% tax penalty.
8. Roth conversions. Converting a traditional IRA to a Roth is more compelling when both spouses are alive because the total tax on, say, a $20,000 conversion should be lower than it would be for a single individual. An added bonus: After the first spouse dies, these earlier Roth conversions will result in lower required minimum distributions (RMDs) for the surviving spouse���and those RMDs could mean big payments to Uncle Sam because they���ll be taxed at the higher rate for single individuals.
9. Health savings accounts. If a spouse is named as beneficiary of a health savings account, he or she can continue to benefit from the account���s tax-free growth. That isn���t true for non-spouse beneficiaries. Instead, for non-spouse beneficiaries, the account immediately becomes fully taxable upon the death of the owner.
10. Step-up in basis. Upon the death of a spouse, the assets held in the deceased���s name get a step-up in cost basis, thus nixing any embedded capital gains tax bill. If the assets are held jointly, there is a step-up in basis on half of the assets���unless it���s a community property state, in which case all jointly owned assets may receive the full step-up in basis. The step-up in basis affects both taxable account investments and real estate, but not retirement accounts.
James McGlynn, CFA, RICP, is chief executive of
Next Quarter Century LLC
��in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of��
Retirement Planning Tips for Baby Boomers
. Check out his earlier articles.The post Left Alone appeared first on HumbleDollar.
August 10, 2021
Missing Takeoff
As a daily viewer of CNBC, it���s been hard to ignore the performance of Moderna over the past 16 months. It has increased more than 300% in 2021 and yesterday it was up more than 17%.
As I watched CNBC yesterday, I said to myself, ���It���s a bummer I didn���t buy shares last year, but at least I���m getting some upside now that Moderna is in the S&P 500.��� I spent a little time analyzing this attempt at rationalization���and the results weren���t consoling.
Moderna was trading at $321 per share on July 21, the day it joined the S&P 500. On that date, it made up 0.26% of the index. If you had $10,000 invested in an S&P 500 fund, you indirectly owned $26 worth of Moderna stock���about one-twelfth of a share���when it joined the index.
Since joining the S&P 500 index, Moderna stock has climbed some 50% to more than $484 per share at yesterday���s close. Assuming the same $10,000 investment, you have made about $13 on Moderna over the past few weeks. You read that right: Despite Moderna���s substantial price appreciation, the money you made would barely buy avocado toast.
My conclusions? First, you won���t get rich quickly through index fund investing. While you���re well-diversified against the risk of any one stock cratering, you���ll also see limited upside from a superstar like Moderna.
Second, Moderna has risen to have a market capitalization of close to $200 billion, but it still has a relatively small S&P 500 weighting. The top five companies in the index���Apple, Microsoft, Amazon, Facebook and Alphabet���comprise more than 20% of the index, so even moderate price swings by these stocks will impact the index much more than significant changes in a company of Moderna���s size.
Finally, if you periodically get well-informed gut feelings about individual stocks, it may be worth setting aside a small pool of funds to buy these stocks. Such a mini-portfolio won���t be well-diversified. But you���ll likely have fun with it and, at worst, some losses���and those losses will serve as a reminder to stick with your index funds.
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It���s Always Different
The Fact Book first displays the $58 trillion global stock market���s composition in 2010. The U.S. was 30%, emerging markets 25% and the remainder was a mix of developed foreign markets.
Jump to 2020, and we see significant shifts. The global stock market���s total value has ballooned to $105.8 trillion. Sounds huge, but that���s just a 6.2% annual rate of increase. The U.S. share surged to 38% of the global stock market, while emerging markets shrank to 21%.
It���s a different story for the bond market. In 2010, this $82.3 trillion arena was 37% U.S., 28% European Union countries, 18% Japan and 5% emerging markets. In 2020, the U.S. was pretty much unchanged at 38%, while Europe slumped to 20% and Japan���s share dropped to just 12% of the $123.5 trillion market.
What���s striking is that emerging markets, despite relatively poor stock market returns, increased their bond portion to 17% of the global market. Strong economic growth in emerging markets meant those nations had to take on more debt to finance capital spending.
What about the decade to come? One thing is nearly certain: It���ll look a lot different from the one we just witnessed. It always does.
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Turning Japanese
AS AN INVESTOR, I���d describe myself as a small-cap-value-aholic with a worldly outlook. Right now, I���m betting that one of world���s least loved overseas markets will finally return to favor after decades of disappointment. You can laugh out loud now.
Last year, my investment in U.S. small-cap value stocks was a great play from the March 2020 market bottom through about mid-May of this year. I didn���t catch the market bottom perfectly, but���luckily���I was close.
Since then, the large-cap growth stocks that I���m convinced will fall back to earth someday (they will, won���t they?) have instead resumed their inexorable outperformance. Admittedly, I thought Apple stock was too popular 10 years ago, which is why I still need to work for a living.
Lately, I���ve been looking to developed foreign markets for small-cap value opportunities. In May 2020, I added money to WisdomTree International SmallCap Dividend Fund and since then it���s up about 50%. Yet its return slightly lags the S&P 500 and trails well behind that of Vanguard Growth ETF.
Fortunately, I try to limit my style bets to about 10% to 15% of my stock portfolio. I own the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google or whatever the latest lineup is) and the rest of the market through my total U.S. and total world stock index funds, as well as through my 2035 target-date fund. With 10 years until retirement, I can���t afford to bet too big on any one style factor���and risk being wrong.
Still, I figure if small-cap value is supposed to work here at home, it should work overseas as well. Foreign stocks have lagged the U.S. market return since 2007. Even more, I like the idea of investing in the most overlooked of the least-loved asset classes.
That���s why I started reading about Japan. Talk about an unloved���perhaps even hated���market. Snake-bit since 1990, investors throw money willy-nilly at China, yet ignore Japanese shares. You could say Japanese small-value stocks are unloved about three times over. It���s as if their appeal is hidden inside one of those Russian matryoshka nesting dolls.
Since May, I have invested close to 2% of my stock holdings in the WisdomTree Japan SmallCap Dividend Fund. Some of the data that convinced me to invest came from WisdomTree itself. It reports that foreign investors have been net sellers of Japanese stocks for many years. To be sure, WisdomTree has an incentive to promote an asset class it also happens to sell shares in.
More data in the WisdomTree report came from the thoughtful, value-oriented and market-skeptical investment managers at GMO (who, it should be noted, sell fund shares as well). They produced historical charts showing which stock classes are at extreme undervaluation, plus projected market-beating expected��future returns should share prices revert to the mean. Japanese stocks may never revert, but the projections are promising: Japanese small-cap shares are a pocket of real value in a world where so many assets have been bid to the moon. In addition, Japanese corporate managers are finally becoming more shareholder friendly, using their mounds of cash to increase dividends and buy back stock.
��
Since my purchase in May, my Japan small-cap stock fund has slightly trailed the broader WisdomTree International SmallCap Dividend Fund that I trimmed to buy it. Altogether, just over 5% of my total stock position is in these two foreign small-cap value funds. I have another 8% invested in U.S. small- and mid-cap value funds.
Japan has had a well-developed small-cap market for, well��� I���m old enough to remember the 1980s. Outside of North America, the largest foreign small-cap markets were���and are���the U.K. and Japan. Back then, we thought Japan was taking over the world. The prevailing wisdom was it would buy��every company and every acre of U.S. commercial real estate, and even every U.S. golf course. (Remember the 1993 movie Rising Sun, with Sean Connery and Wesley Snipes, based on the Michael Crichton novel?)
Instead of the Japanese taking over the U.S. with their capital, we witnessed Japanese shares and real estate collapse after one of the most storied investment bubbles in history. Ever since, Japan���s policies have been held up as examples of what not to do in response to a market bust, how not to run an economy and how not to treat foreign shareholders. But change is afoot.
The oldest Japan small-cap fund I can find is the DFA Japanese Small Company Portfolio, which was launched on Jan. 31, 1986. It���s up 37% since the Japanese market peaked on Dec. 29, 1989. That���s not a typo: Just 37%, versus more than 2,200% for Vanguard���s S&P 500 index fund.
I���m thinking that the cheap valuation and neglect of Japanese small-cap value shares by foreign investors, coupled with the companies��� more shareholder-friendly practices, make betting on reversion to the mean a reasonable strategy���at least with a small slice of my portfolio.
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.
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August 9, 2021
Better Together
I believe it all comes down to the high level of stress that Americans carry, much of it caused by economic hardship. Far too many Americans, both young and old, live paycheck to paycheck. That can feel helpless and uncertain. It���s stressful to have too much debt or to lack the savings needed to meet everyday needs.
Out of necessity, Americans are returning to intergenerational living. According to Pew Reseach Center, 16.1% of Americans lived in multigenerational households as of 2008���and the long-term trend has been up. That���s one in six American households where there are adults from at least two generations or where there���s a grandparent living with a grandchild.
Living together and supporting each other makes good economic sense. It���s cheaper to run one household than two.
There are also emotional benefits, especially for working parents. Stress levels can be greatly reduced if you no longer have to pay for daycare, find babysitters or arrange for summer camps. On top of that, it���s comforting to know there will always be someone to meet the kids at the school-bus stop, and maybe also a hot meal waiting on the table after a long day at work.
You can see that I���m a big fan of multigenerational living. And it comes with the added benefit of bringing families closer together.
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