Jonathan Clements's Blog, page 277
August 5, 2021
A Note of Cynicism
DO YOU HAVE A LOT of stuff���all those things that fill your basement, attic and garage? Dealing with these accumulated possessions is hard. But there are folks who have figured it out: They sell everything, even their house and car.
I regularly read blogs written by people who ���retired��� in their 30s and 40s, all of them living in stressless financial bliss. These folks live frugally off their dividends, other passive income and, of course, by sharing their acquired expertise on their moneymaking websites. I���m addicted to these blogs. I don���t want to miss the latest message about their successful minimalist lifestyle.
If you detect a note of cynicism from someone who worked from age 14 to 67, you���re very perceptive.
Some of these retirees are self-described nomads who sold almost all their possessions and now travel around the world at will. Several live outside the U.S. at far lower costs or in relatively remote areas of the U.S. Some live in an RV fulltime. One man sent me a note saying he lives very well in an upscale condo community on less than $1,000 a month. It wasn���t until his fourth message that he mentioned it was in Thailand.
Often, these retirees claim to be living on incomes that most others would view as subsistence level and even in need of public assistance. Indeed, there are those who intentionally keep their income low to benefit from various government subsidies and tax credits, while at the time crowing about their seven-figure net worth. Hey, it���s all legal.
There are many tradeoffs involved in being a nine-to-five dropout, most of which few people would be willing or able to accept. On the other hand, there are lessons to be learned, like having lots of stuff isn���t necessary for happiness. Clearly, there are different definitions of happiness. Still, I take much of the ���wisdom��� from these super-early retirees with a large grain of salt.
The post A Note of Cynicism appeared first on HumbleDollar.
A Well-Placed Bet
THREE YEARS AGO, I bought a home a few weeks before getting married. The purchase wasn���t so much an investment as a necessity: My new husband and I owned four dogs between us, and we knew we���d have a difficult time finding a rental that would allow that many pets.
I���d lived in the Portland, Oregon, metro area for nearly 30 years and had owned two other homes. I knew which neighborhoods to avoid, as well as which ones were coveted. I ultimately settled on a small, slightly outdated home located in a desirable suburb. My husband and I knew we���d only be living in the house for a few years before selling and moving to Arizona, so I was reluctant to spend too much on a transitional property.
At the time, mortgage rates were rising at a moderate pace and property values seemed to have stagnated. My plan: Do a few cosmetic updates to the house and hope housing prices would increase enough so that, when we sold, I���d recoup my down payment and closing costs.
Instead, housing prices have soared to heights I never would have predicted. In our neighborhood, homes of similar size and quality are regularly selling for $100,000 more than what I paid in 2018. Bidding wars frequently break out and many houses sell for tens of thousands of dollars over asking price.
And although we���re still a ways off from listing the house for sale, I���ve even more reason to be pleased with my (unintentionally good) market timing: Trader Joe���s recently announced it���ll be opening a new store just a few blocks from where we live. That, I���m guessing, will drive up prices even more.
I���d lived in the Portland, Oregon, metro area for nearly 30 years and had owned two other homes. I knew which neighborhoods to avoid, as well as which ones were coveted. I ultimately settled on a small, slightly outdated home located in a desirable suburb. My husband and I knew we���d only be living in the house for a few years before selling and moving to Arizona, so I was reluctant to spend too much on a transitional property.
At the time, mortgage rates were rising at a moderate pace and property values seemed to have stagnated. My plan: Do a few cosmetic updates to the house and hope housing prices would increase enough so that, when we sold, I���d recoup my down payment and closing costs.
Instead, housing prices have soared to heights I never would have predicted. In our neighborhood, homes of similar size and quality are regularly selling for $100,000 more than what I paid in 2018. Bidding wars frequently break out and many houses sell for tens of thousands of dollars over asking price.
And although we���re still a ways off from listing the house for sale, I���ve even more reason to be pleased with my (unintentionally good) market timing: Trader Joe���s recently announced it���ll be opening a new store just a few blocks from where we live. That, I���m guessing, will drive up prices even more.
The post A Well-Placed Bet appeared first on HumbleDollar.
Not Buying It
I���VE BEEN READING UP on stock buybacks because I want to know how they���ll impact my investments. As best I can gather, there are two schools of thought: Those who love them���and those who hate them.
Those who love them point to the reduction in the number of shares, which means the value of those that remain should increase. Earnings per share (EPS) is net income divided by the number of shares, and EPS increases when shares decrease. To me, this artificially increases earnings and doesn���t in any way indicate the company���s health has improved. Did the company make more money on what it actually sold? No, there are just less shares to go around.
I guess I���ve already said enough about those who love them. Then there���s me, who hates them. First of all, I���d rather get a dividend or increased dividend. But I also wonder if that money couldn���t have been put to better use investing in the company���s future growth.
It might make sense to buy back shares when they���re cheap. Unfortunately, too often the opposite is the case. As CEO Jamie Dimon put it recently, JPMorgan Chase���s reason for buying back shares was simply because their ���cup runneth over.��� Suffice it to say, this market isn���t cheap, but companies like Apple, Alphabet and others are buying back stock like crazy.
What really galls me: Bonuses to company executives are often tied to share price growth. Now that���s manipulation at its finest.
Those who love them point to the reduction in the number of shares, which means the value of those that remain should increase. Earnings per share (EPS) is net income divided by the number of shares, and EPS increases when shares decrease. To me, this artificially increases earnings and doesn���t in any way indicate the company���s health has improved. Did the company make more money on what it actually sold? No, there are just less shares to go around.
I guess I���ve already said enough about those who love them. Then there���s me, who hates them. First of all, I���d rather get a dividend or increased dividend. But I also wonder if that money couldn���t have been put to better use investing in the company���s future growth.
It might make sense to buy back shares when they���re cheap. Unfortunately, too often the opposite is the case. As CEO Jamie Dimon put it recently, JPMorgan Chase���s reason for buying back shares was simply because their ���cup runneth over.��� Suffice it to say, this market isn���t cheap, but companies like Apple, Alphabet and others are buying back stock like crazy.
What really galls me: Bonuses to company executives are often tied to share price growth. Now that���s manipulation at its finest.
The post Not Buying It appeared first on HumbleDollar.
Be Like Burt?
I RECENTLY HAD LUNCH with four friends I���ve known since the seventh grade. Because of the pandemic, this was the first time we���d all seen each other in more than a year. Every time we���re together, I���m reminded of how important my friends were in helping me start a new life when I left home for the first time. Our continuing support for each other is probably the reason we���ve stayed close for 57 years.
At lunch, we spent a great deal of time talking about our health. It seems that's the way it goes when a bunch of 70-year-old retirees get together. Burt, who is overweight and loves his beer, might be the healthiest of the group. He doesn���t take any medication and jokes that his diet consists primarily of junk food.
After a while, the conversation veered off into a discussion about money. Burt tells us that he doesn't think he���ll run out of money. I don���t doubt what he���s saying. Burt worked in the aerospace industry and earned an above-average wage with excellent benefits.
You might assume he���s careless with money because of his undisciplined eating habits. But Burt was a good saver, which I���m sure was important in helping him achieve financial security. He and his wife still live in the same two bedroom, 840-square-foot house they bought in 1977. They raised two boys in that house, who shared the same small bedroom until the oldest left home.
Listening to him, what I found so fascinating is the amount of money he has in annuities. He���s a multimillionaire who has about half his money in income annuities and the other half in stocks. He has no bonds in his investment portfolio. With this strategy, he���s confident he���ll never outlive his money, while leaving a legacy for his children.
That got me thinking: Should my wife and I put our retirement money in income annuities rather than bonds? With a lifetime income annuity, you give money upfront to an insurer, which then provides you with guaranteed income for life. The insurer might start paying that income right away or at a predetermined date in the future. The payments are fixed. The amount is based on your current age, the age at which you start receiving income, your gender and the amount of money you invest.
Two of the most common annuities are immediate fixed annuities and longevity insurance. These are the two types that Burt and his wife own.
An immediate fixed annuity, sometimes referred to as a single premium immediate annuity (SPIA), is the simplest annuity you can buy. Based on how much money you give an insurer today, you receive a monthly stream of income for life.
Longevity insurance, also known as a deferred income annuity (DIA), is designed for people who want income starting at a predetermined future age. The initial investment might be made up to 40 years before receiving income.
I would never do what Burt did and have all our fixed-income money in annuities. I wouldn���t want to lock up that much of our retirement money in something that���s illiquid and doesn���t provide a high rate of return. That said, I could see buying an annuity that would bridge the gap between what we get from Social Security and what we spend on nondiscretionary expenses that we couldn���t live without, such as housing and food. That way, our basic retirement expenses would be covered for as long as my wife and I live, while allowing us to invest more heavily in stocks.
There���s another reason I think an annuity could play an important role in our investment portfolio. If we bought a qualified longevity annuity contract (QLAC), we could reduce the taxes we pay on our required minimum distributions (RMDs). A QLAC is a type of deferred income annuity that can be funded using an IRA or other pretax retirement savings plans.
Using IRA money to fund a QLAC reduces the balance subject to RMDs, resulting in lower taxes. Also, you don���t pay any taxes on the annuity money until you start receiving the income payments, thereby allowing you to continue deferring taxes.
I think these are good reasons to own an annuity. Still, after thinking it over, I wouldn't buy one. I made one bet on my longevity by delaying Social Security until age 70. I���m not willing to place another bet by buying an annuity, especially when I���m convinced our stock and bond funds will provide us with a lifetime of income.
Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor's degree in history and an MBA. A self-described "humble investor," he likes reading historical novels and about personal finance. Check out his earlier��articles��and follow him on Twitter @DMFrie.
At lunch, we spent a great deal of time talking about our health. It seems that's the way it goes when a bunch of 70-year-old retirees get together. Burt, who is overweight and loves his beer, might be the healthiest of the group. He doesn���t take any medication and jokes that his diet consists primarily of junk food.
After a while, the conversation veered off into a discussion about money. Burt tells us that he doesn't think he���ll run out of money. I don���t doubt what he���s saying. Burt worked in the aerospace industry and earned an above-average wage with excellent benefits.
You might assume he���s careless with money because of his undisciplined eating habits. But Burt was a good saver, which I���m sure was important in helping him achieve financial security. He and his wife still live in the same two bedroom, 840-square-foot house they bought in 1977. They raised two boys in that house, who shared the same small bedroom until the oldest left home.
Listening to him, what I found so fascinating is the amount of money he has in annuities. He���s a multimillionaire who has about half his money in income annuities and the other half in stocks. He has no bonds in his investment portfolio. With this strategy, he���s confident he���ll never outlive his money, while leaving a legacy for his children.
That got me thinking: Should my wife and I put our retirement money in income annuities rather than bonds? With a lifetime income annuity, you give money upfront to an insurer, which then provides you with guaranteed income for life. The insurer might start paying that income right away or at a predetermined date in the future. The payments are fixed. The amount is based on your current age, the age at which you start receiving income, your gender and the amount of money you invest.
Two of the most common annuities are immediate fixed annuities and longevity insurance. These are the two types that Burt and his wife own.
An immediate fixed annuity, sometimes referred to as a single premium immediate annuity (SPIA), is the simplest annuity you can buy. Based on how much money you give an insurer today, you receive a monthly stream of income for life.
Longevity insurance, also known as a deferred income annuity (DIA), is designed for people who want income starting at a predetermined future age. The initial investment might be made up to 40 years before receiving income.
I would never do what Burt did and have all our fixed-income money in annuities. I wouldn���t want to lock up that much of our retirement money in something that���s illiquid and doesn���t provide a high rate of return. That said, I could see buying an annuity that would bridge the gap between what we get from Social Security and what we spend on nondiscretionary expenses that we couldn���t live without, such as housing and food. That way, our basic retirement expenses would be covered for as long as my wife and I live, while allowing us to invest more heavily in stocks.
There���s another reason I think an annuity could play an important role in our investment portfolio. If we bought a qualified longevity annuity contract (QLAC), we could reduce the taxes we pay on our required minimum distributions (RMDs). A QLAC is a type of deferred income annuity that can be funded using an IRA or other pretax retirement savings plans.
Using IRA money to fund a QLAC reduces the balance subject to RMDs, resulting in lower taxes. Also, you don���t pay any taxes on the annuity money until you start receiving the income payments, thereby allowing you to continue deferring taxes.
I think these are good reasons to own an annuity. Still, after thinking it over, I wouldn't buy one. I made one bet on my longevity by delaying Social Security until age 70. I���m not willing to place another bet by buying an annuity, especially when I���m convinced our stock and bond funds will provide us with a lifetime of income.
Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor's degree in history and an MBA. A self-described "humble investor," he likes reading historical novels and about personal finance. Check out his earlier��articles��and follow him on Twitter @DMFrie.The post Be Like Burt? appeared first on HumbleDollar.
August 4, 2021
Did I Say That?
THE MOST FAMOUS market-timing (mis)statement may be that of Irving Fisher, who���as a result���ultimately suffered a fate similar to that of President Herbert Hoover. Both men are inextricably linked to the Great Depression, despite a lifetime of achievement and their positive work to improve the lives of humans everywhere. Fisher, whose theories on capital, interest rates and lifecycle investing are still relied on by economists today, will likely continue to be remembered for his��statement��nine days before the 1929 market crash that, ���Stocks have reached what looks like a permanently high plateau.���
He continued to double down on his statements that the market would head higher for many months, while instead it careened lower. Fisher went down with the ship, losing his entire fortune, which was worth more than $100 million in today���s money.
Want a more recent example of how hard it is to time the market? Alan Greenspan, at the time chair of the Federal Reserve, famously told the world in 1996 that the stock market was experiencing ���irrational exuberance,��� causing initial stock-market selling before shares resumed their march higher.
Greenspan came up with the speech in the bathtub (seriously). He gives himself��a "C" for his forecast, which I consider generous. Being really early is the same as being really wrong. How much higher did stocks climb before the tech bubble burst more than three years later���at which point the market briefly dipped below Greenspan���s ���irrational exuberance��� level? Well, a picture is worth a thousand words.
What���s the best market-timing statement of all time? Consider the quote once offered by America's then-wealthiest man, J.P. Morgan. When asked what the market would do that day, he��purportedly��responded, ���It will fluctuate.���
He continued to double down on his statements that the market would head higher for many months, while instead it careened lower. Fisher went down with the ship, losing his entire fortune, which was worth more than $100 million in today���s money.
Want a more recent example of how hard it is to time the market? Alan Greenspan, at the time chair of the Federal Reserve, famously told the world in 1996 that the stock market was experiencing ���irrational exuberance,��� causing initial stock-market selling before shares resumed their march higher.
Greenspan came up with the speech in the bathtub (seriously). He gives himself��a "C" for his forecast, which I consider generous. Being really early is the same as being really wrong. How much higher did stocks climb before the tech bubble burst more than three years later���at which point the market briefly dipped below Greenspan���s ���irrational exuberance��� level? Well, a picture is worth a thousand words.
What���s the best market-timing statement of all time? Consider the quote once offered by America's then-wealthiest man, J.P. Morgan. When asked what the market would do that day, he��purportedly��responded, ���It will fluctuate.���
The post Did I Say That? appeared first on HumbleDollar.
Buying Everything
IN A FEW YEARS, my wife and I will have additional income, thanks to both Social Security benefits and required minimum distributions from our IRAs. Our thought: Any money we don���t spend from these two income streams we���ll invest for the long term. We wanted to keep this money separate from our other investments, so we opened a new joint brokerage account at Vanguard Group.
We decided to invest our extra cash in the Vanguard Total World Stock ETF��(symbol: VT). It���s a highly diversified portfolio and costs just 0.08% a year, equal to eight cents for every $100 invested. The Vanguard fund tracks the FTSE Global All-Cap Index and owns more than 9,000 stocks. It reflects the composition of the global market, with 58% of its assets in U.S. shares and the rest invested abroad.
We thought this would be a hassle-free way for an aging couple to invest their money in their later years. We don���t have to rebalance because the fund simply buys all of the world���s significant companies according to their stock market value. Since it���s an exchange-traded index fund and it has no bonds, it should be highly tax-efficient, with relatively little taxable income generated each year. We plan to invest in the fund slowly over time, which means we���ll benefit from stock market dips.
We decided to invest our extra cash in the Vanguard Total World Stock ETF��(symbol: VT). It���s a highly diversified portfolio and costs just 0.08% a year, equal to eight cents for every $100 invested. The Vanguard fund tracks the FTSE Global All-Cap Index and owns more than 9,000 stocks. It reflects the composition of the global market, with 58% of its assets in U.S. shares and the rest invested abroad.
We thought this would be a hassle-free way for an aging couple to invest their money in their later years. We don���t have to rebalance because the fund simply buys all of the world���s significant companies according to their stock market value. Since it���s an exchange-traded index fund and it has no bonds, it should be highly tax-efficient, with relatively little taxable income generated each year. We plan to invest in the fund slowly over time, which means we���ll benefit from stock market dips.
The post Buying Everything appeared first on HumbleDollar.
Black Beauty
AFTER 20 YEARS, the U.S. military has withdrawn from Afghanistan. The news brought back memories of the year I spent deployed there���and a crucial financial lesson I learned. Perhaps that lesson resonates even more today given the past year���s pandemic and the role deferred gratification has lately played in many of our lives.
When you���re deployed to a combat zone, the government doesn���t tax your wages. Consequently, most soldiers can sock away a lot of money. From a financial point of view, being deployed is a lot like being stuck in your house during the pandemic���assuming you���re fortunate enough to remain employed. Your expenses drop precipitously, so you���re able to increase your savings rate sharply.
For my wife and me, saving is an important part of our family ethos. Our savings rate typically approaches 50% of our income. But here���s the thing: During the year I was deployed, we saved nothing���and I have zero regrets.
At that time, my wife was a medical student and first-year resident. While her income was negligible, we still had her rent and other bills to pay. With the remainder of my salary, I spent the entire year in Afghanistan saving for what most personal finance experts would consider one of the worst uses for money: buying a new car.
That year was one of my life���s bleakest periods. Four months into my deployment, I committed to purchasing a car through a program offered to deployed servicemembers. I paid a large chunk of my salary each month until the vehicle was totally paid off at the end of the deployment. In return, I received a small discount on a car that I was allowed to customize.
And it wasn���t just any new car. I bought a 2013 black Ford Mustang GT Premium California Special Edition. I spent months designing the color of the car, the color of the racing stripes and their location, and whether I wanted window louvers.
I longed for that car and thinking about it offered an incredible escape from reality. When I eventually got to feel the full power of the 442-horsepower V8 engine on a back road somewhere between Tennessee and Texas, the feeling was indescribable.
I paid roughly $36,000 for that depreciating asset, which would easily be worth more than triple that amount today had I invested it in an index fund. Looking back on my time in Afghanistan, simply having something to take my mind off the current situation was incalculably the best investment I could've made.
Writer Morgan Housel recently��drove this point home when he discussed why the poorest Americans spend roughly $400 a year on lottery tickets, which is substantially more than other Americans. To most readers, spending money on impossibly long odds���instead of saving, investing and letting compounding work its magic���makes absolutely no sense. But in truth, the reason poorer Americans buy lottery tickets makes perfect sense: Those tickets offer hope for a better tomorrow and an escape from their current reality.
After the past 18 months, during which we���ve been denied many of the things we���d previously taken for granted, I hope we can all relate. Despite the Delta variant, the pandemic chapter of our lives appears to be drawing to a close, just as the Afghanistan War has finally ended. We now have the chance to enjoy all those things we���ve longed for���eating in restaurants, taking exotic vacations, visiting family members���the anticipation of which has sustained us through this grim period.
For me, a key takeaway from the pandemic and my experience in Afghanistan is this: Someone else���s return on investment from buying lottery tickets, a new car or an expensive vacation will be different from my return on that same investment. And that���s as it should be���because their reality is different from mine.
John Goodell is general counsel for the Texas Veterans Commission. He has spent much of his career advocating for military and veterans on tax, estate planning and retirement issues. His biggest passion is spending time with his wife and kids. Follow John at HighGroundPlanning.com��and on Twitter @HighGroundPlan, and check out his earlier articles.
When you���re deployed to a combat zone, the government doesn���t tax your wages. Consequently, most soldiers can sock away a lot of money. From a financial point of view, being deployed is a lot like being stuck in your house during the pandemic���assuming you���re fortunate enough to remain employed. Your expenses drop precipitously, so you���re able to increase your savings rate sharply.
For my wife and me, saving is an important part of our family ethos. Our savings rate typically approaches 50% of our income. But here���s the thing: During the year I was deployed, we saved nothing���and I have zero regrets.
At that time, my wife was a medical student and first-year resident. While her income was negligible, we still had her rent and other bills to pay. With the remainder of my salary, I spent the entire year in Afghanistan saving for what most personal finance experts would consider one of the worst uses for money: buying a new car.
That year was one of my life���s bleakest periods. Four months into my deployment, I committed to purchasing a car through a program offered to deployed servicemembers. I paid a large chunk of my salary each month until the vehicle was totally paid off at the end of the deployment. In return, I received a small discount on a car that I was allowed to customize.
And it wasn���t just any new car. I bought a 2013 black Ford Mustang GT Premium California Special Edition. I spent months designing the color of the car, the color of the racing stripes and their location, and whether I wanted window louvers.
I longed for that car and thinking about it offered an incredible escape from reality. When I eventually got to feel the full power of the 442-horsepower V8 engine on a back road somewhere between Tennessee and Texas, the feeling was indescribable.
I paid roughly $36,000 for that depreciating asset, which would easily be worth more than triple that amount today had I invested it in an index fund. Looking back on my time in Afghanistan, simply having something to take my mind off the current situation was incalculably the best investment I could've made.
Writer Morgan Housel recently��drove this point home when he discussed why the poorest Americans spend roughly $400 a year on lottery tickets, which is substantially more than other Americans. To most readers, spending money on impossibly long odds���instead of saving, investing and letting compounding work its magic���makes absolutely no sense. But in truth, the reason poorer Americans buy lottery tickets makes perfect sense: Those tickets offer hope for a better tomorrow and an escape from their current reality.
After the past 18 months, during which we���ve been denied many of the things we���d previously taken for granted, I hope we can all relate. Despite the Delta variant, the pandemic chapter of our lives appears to be drawing to a close, just as the Afghanistan War has finally ended. We now have the chance to enjoy all those things we���ve longed for���eating in restaurants, taking exotic vacations, visiting family members���the anticipation of which has sustained us through this grim period.
For me, a key takeaway from the pandemic and my experience in Afghanistan is this: Someone else���s return on investment from buying lottery tickets, a new car or an expensive vacation will be different from my return on that same investment. And that���s as it should be���because their reality is different from mine.
John Goodell is general counsel for the Texas Veterans Commission. He has spent much of his career advocating for military and veterans on tax, estate planning and retirement issues. His biggest passion is spending time with his wife and kids. Follow John at HighGroundPlanning.com��and on Twitter @HighGroundPlan, and check out his earlier articles.The post Black Beauty appeared first on HumbleDollar.
August 3, 2021
What���s Your Number?
MY WIFE AND I are aiming to retire in 10 or 15 years. With��the Dow Jones Industrial Average close to 35,000, I can't help but wonder: At what level for the Dow can we retire?
Yes, I know the Dow is a terrible index. But it's also the one that���s most commonly mentioned in the media. I've followed it for most of my life, so I'm much more emotionally tied to it than the S&P 500 or any other index.
We're still socking away money for retirement, so our magic Dow number isn���t fixed. On top of that, the Dow companies are throwing off dividends that we���re then reinvesting, which further complicates the math. Currently, the dividend yield on the Dow stocks hovers under 2%, so it may have only a modest impact on our retirement number. Still, if I were gifted at math, I could probably figure it out. But since I'm not, I'm left trying to guess.
If the market were to double, we could certainly hit our goal and retire early. That would put the Dow at 70,000. But what if the Dow industrials were just 50,000 or 60,000? Would that be enough? Depending on how quickly it happens, the answer is likely ���yes,��� because in the meantime we���ll have saved thousands of dollars more, which will also be growing.
To be sure, these large numbers seem far off. But then again, it wasn't too long ago that Dow 35,000 seemed unthinkable. When I started investing in 2007, the Dow was close to 14,000���and it went as low as 6,600 during the 2007-09 crash. We���ve come a long way.
I can���t tell you how quickly we���ll get there. But when you see the Dow 50,000 headline, think of me on the beach with a fruity drink. If you happen to walk by, I'll buy you one, too.
Yes, I know the Dow is a terrible index. But it's also the one that���s most commonly mentioned in the media. I've followed it for most of my life, so I'm much more emotionally tied to it than the S&P 500 or any other index.
We're still socking away money for retirement, so our magic Dow number isn���t fixed. On top of that, the Dow companies are throwing off dividends that we���re then reinvesting, which further complicates the math. Currently, the dividend yield on the Dow stocks hovers under 2%, so it may have only a modest impact on our retirement number. Still, if I were gifted at math, I could probably figure it out. But since I'm not, I'm left trying to guess.
If the market were to double, we could certainly hit our goal and retire early. That would put the Dow at 70,000. But what if the Dow industrials were just 50,000 or 60,000? Would that be enough? Depending on how quickly it happens, the answer is likely ���yes,��� because in the meantime we���ll have saved thousands of dollars more, which will also be growing.
To be sure, these large numbers seem far off. But then again, it wasn't too long ago that Dow 35,000 seemed unthinkable. When I started investing in 2007, the Dow was close to 14,000���and it went as low as 6,600 during the 2007-09 crash. We���ve come a long way.
I can���t tell you how quickly we���ll get there. But when you see the Dow 50,000 headline, think of me on the beach with a fruity drink. If you happen to walk by, I'll buy you one, too.
The post What���s Your Number? appeared first on HumbleDollar.
Unexpected Bonus
FRUGALITY GETS A BAD rap these days. It seems today���s standard advice is to ���go ahead and buy your darn daily latte.��� Instead, we���re told to worry about bigger financial issues.
That���s probably good advice. Small purchases here and there will likely boost our mood, while clipping coupons probably won���t move the net worth needle. Still, I���ve adopted a cheapskate practice that can be lucrative: brokerage firm retention bonuses.
To snag these bonuses, you typically need a sizable IRA or taxable account. The strategy is to call up your brokerage firm and mention a juicy cash transfer offer you see at a competing asset manager. Don���t be surprised if the firm matches that offer if you simply stay put.
I had this happen three times last year.
I was simply looking to consolidate accounts, but none of the investment companies wanted me to leave. The result was more than $1,000 of retention bonus money plopped into one IRA and two taxable accounts.
Be aware that you���ll receive a 1099 on a bonus paid to your taxable account. Another thing to consider: If you end up sticking with high-cost funds, that can effectively negate any cash bonus. For example, if you own an index fund at 0.14%, but could own the same thing for 0.04% elsewhere, that���s $500 per year of extra fees on a $500,000 position.
I wasn���t looking to score retention bonuses a year ago. I just took what was offered. My plan (don���t tell anyone) is to try the same routine in about six months. I���ll let you know how it goes.
That���s probably good advice. Small purchases here and there will likely boost our mood, while clipping coupons probably won���t move the net worth needle. Still, I���ve adopted a cheapskate practice that can be lucrative: brokerage firm retention bonuses.
To snag these bonuses, you typically need a sizable IRA or taxable account. The strategy is to call up your brokerage firm and mention a juicy cash transfer offer you see at a competing asset manager. Don���t be surprised if the firm matches that offer if you simply stay put.
I had this happen three times last year.
I was simply looking to consolidate accounts, but none of the investment companies wanted me to leave. The result was more than $1,000 of retention bonus money plopped into one IRA and two taxable accounts.
Be aware that you���ll receive a 1099 on a bonus paid to your taxable account. Another thing to consider: If you end up sticking with high-cost funds, that can effectively negate any cash bonus. For example, if you own an index fund at 0.14%, but could own the same thing for 0.04% elsewhere, that���s $500 per year of extra fees on a $500,000 position.
I wasn���t looking to score retention bonuses a year ago. I just took what was offered. My plan (don���t tell anyone) is to try the same routine in about six months. I���ll let you know how it goes.
The post Unexpected Bonus appeared first on HumbleDollar.
Shifting Gears (II)
I LEFT MY CORPORATE job a year ago to start a second career in higher education. At the time, I offered five pieces of advice to those considering a similar change. That advice included creating a plan with your family, giving your desired new career a test drive and taking advantage of deferred compensation plans. A year into my new career change, here are four additional tips:
1. Estimate the point of no return. Last year, I urged people���once they had found their passion and done an adequate amount of planning���to ���just do it.��� While I still think it���s important not to procrastinate unnecessarily, I���ve also come to believe it���s prudent for career changers to ask colleagues and recruiters, ���How long can I be away from my current career before I limit my ability to return?���
If the consensus answer is that opting to leave for even a short time will make it hard to return, you may want to be slower to change careers, so you have extra time to chew over the decision. If you decide not to change right away, consider whether there are ways to incorporate elements of your desired career into your existing role or if you could take classes to prepare for your next job.
2. Consider the credentials you���ll need. When I made my shift to higher education, my goal was to spend most of my time teaching, coaching and mentoring students. While I���ve been successful in hitting that goal, I sense that I���ll soon want to expand my focus. The issue I face: My credentials may not meet the minimum qualifications for certain leadership roles.
While I knew this coming in, I probably should have spent more time exploring the necessary qualifications for advancement in higher education. If professional credentials or further education will be required for promotions in your new career, identify programs that���ll allow you to earn the needed credentials and consider whether you should pursue them before you make your career shift.
3. Figure out what you���ll do with your spare time. Many folks see having more free time as a good thing. Indeed, more time to pursue personal interests can be a key reason people make career changes. If you���re shifting to a less time-demanding role, however, you may struggle with how to utilize your newly found time. As part of your transition, I recommend estimating how much spare time you will have and when you���ll have that time. Will you free up a few hours per day or will it come to you in chunks at certain times each year? If you will have significant additional free time, ponder how you���ll use and enjoy it.
My old job was heavily scheduled, but I now have more flexibility. I���ve used some of the freed-up time to coach my daughter���s track and field team���a new sport for me. Practices are three days a week, providing a little more structure for my now less-structured life.
4. Collect deferred compensation over time. During my final five years in my corporate job, I put a little money each year into the company���s deferred compensation plan, knowing it would come in handy when I switched to my new, lower-paying career. That deferred compensation was paid out earlier this year.
While I���m happy I made the deferrals, I probably made a mistake in having the money paid out as a single lump sum. If, instead, I���d had the payout spread over multiple years, the tax bite would likely have been less.
Kyle McIntosh, CPA, MBA, is a fulltime lecturer at the California Lutheran University School of Management. He turned his career focus to teaching after 23 years working in accounting and finance roles for large corporations. Kyle lives in Southern California with his wife, two children and their overly friendly goldendoodle. Follow Kyle on Twitter @KyleGMcIntosh��and check out his earlier articles.
1. Estimate the point of no return. Last year, I urged people���once they had found their passion and done an adequate amount of planning���to ���just do it.��� While I still think it���s important not to procrastinate unnecessarily, I���ve also come to believe it���s prudent for career changers to ask colleagues and recruiters, ���How long can I be away from my current career before I limit my ability to return?���
If the consensus answer is that opting to leave for even a short time will make it hard to return, you may want to be slower to change careers, so you have extra time to chew over the decision. If you decide not to change right away, consider whether there are ways to incorporate elements of your desired career into your existing role or if you could take classes to prepare for your next job.
2. Consider the credentials you���ll need. When I made my shift to higher education, my goal was to spend most of my time teaching, coaching and mentoring students. While I���ve been successful in hitting that goal, I sense that I���ll soon want to expand my focus. The issue I face: My credentials may not meet the minimum qualifications for certain leadership roles.
While I knew this coming in, I probably should have spent more time exploring the necessary qualifications for advancement in higher education. If professional credentials or further education will be required for promotions in your new career, identify programs that���ll allow you to earn the needed credentials and consider whether you should pursue them before you make your career shift.
3. Figure out what you���ll do with your spare time. Many folks see having more free time as a good thing. Indeed, more time to pursue personal interests can be a key reason people make career changes. If you���re shifting to a less time-demanding role, however, you may struggle with how to utilize your newly found time. As part of your transition, I recommend estimating how much spare time you will have and when you���ll have that time. Will you free up a few hours per day or will it come to you in chunks at certain times each year? If you will have significant additional free time, ponder how you���ll use and enjoy it.
My old job was heavily scheduled, but I now have more flexibility. I���ve used some of the freed-up time to coach my daughter���s track and field team���a new sport for me. Practices are three days a week, providing a little more structure for my now less-structured life.
4. Collect deferred compensation over time. During my final five years in my corporate job, I put a little money each year into the company���s deferred compensation plan, knowing it would come in handy when I switched to my new, lower-paying career. That deferred compensation was paid out earlier this year.
While I���m happy I made the deferrals, I probably made a mistake in having the money paid out as a single lump sum. If, instead, I���d had the payout spread over multiple years, the tax bite would likely have been less.
Kyle McIntosh, CPA, MBA, is a fulltime lecturer at the California Lutheran University School of Management. He turned his career focus to teaching after 23 years working in accounting and finance roles for large corporations. Kyle lives in Southern California with his wife, two children and their overly friendly goldendoodle. Follow Kyle on Twitter @KyleGMcIntosh��and check out his earlier articles.The post Shifting Gears (II) appeared first on HumbleDollar.
