Jonathan Clements's Blog, page 278
August 2, 2021
Summer Relief
LIVING IN THE PACIFIC Northwest, my favorite time of year is summer. I love the extra daylight and relief from the nagging rain. In recent years, there���s been an additional reason to look forward to summer: I get to see my paycheck again.
Some background: A few years ago, in an online investment forum, another participant���I���ll call him Dave���gave me a tip for early retirement. He suggested that I practice living off my investment portfolio even while working. Many early retirees, in Dave���s opinion, spend too little in the initial years because they struggle with depleting their savings.
I decided to give it a try. As a first step, I maxed out my payroll 401(k) contribution. The leftover money in each paycheck went to the employee stock purchase plan and additional tax withholding. These various payroll deductions exhausted my entire part-time pay. That meant I had to cover all my expenses with my investment accounts.
As Dave suspected, I���ve had a hard time spending from my brokerage account, especially if it involved selling investments. I figured that a monthly cash distribution would work better psychologically. This prompted me to look for more income-generating investments, such as closed-end bond, utility and real estate funds. Their monthly distributions cover my groceries and utilities. For most of my other funds, the first-quarter distributions arrive in April, just in time to take care of the property tax payments. I tend to defer big-ticket expenses until later months when I start seeing my paycheck again.
Recently, extra cash showed up in my bank account on payday. It���s a sign that that my total 401(k) contribution���pretax, catchup and after-tax investments���reached the maximum annual limit. The paycheck drought is over for another year.
Some background: A few years ago, in an online investment forum, another participant���I���ll call him Dave���gave me a tip for early retirement. He suggested that I practice living off my investment portfolio even while working. Many early retirees, in Dave���s opinion, spend too little in the initial years because they struggle with depleting their savings.
I decided to give it a try. As a first step, I maxed out my payroll 401(k) contribution. The leftover money in each paycheck went to the employee stock purchase plan and additional tax withholding. These various payroll deductions exhausted my entire part-time pay. That meant I had to cover all my expenses with my investment accounts.
As Dave suspected, I���ve had a hard time spending from my brokerage account, especially if it involved selling investments. I figured that a monthly cash distribution would work better psychologically. This prompted me to look for more income-generating investments, such as closed-end bond, utility and real estate funds. Their monthly distributions cover my groceries and utilities. For most of my other funds, the first-quarter distributions arrive in April, just in time to take care of the property tax payments. I tend to defer big-ticket expenses until later months when I start seeing my paycheck again.
Recently, extra cash showed up in my bank account on payday. It���s a sign that that my total 401(k) contribution���pretax, catchup and after-tax investments���reached the maximum annual limit. The paycheck drought is over for another year.
The post Summer Relief appeared first on HumbleDollar.
Personal Touch
I���M 69 YEARS OLD and so have spent most of my life dealing with people���and businesses���in person. That said, I���ve loved and greatly benefited from the internet revolution and appreciate its marvels in a way that only a person who lived in the ���before��� period can. I���ve been thinking a lot about this recently, and about how important it is���or isn���t���to have face-to-face relationships with the people I do business with.
For many years, I���ve split our investments between Charles Schwab and Vanguard Group, and think highly of both outfits. But Schwab has always had a more personal touch. I���ve long had a representative there with whom I���ve occasionally met in person, made possible by the fact that Schwab has branch offices in my city, as it does all over the country. Even though it���s now been several years since I sat down with my Schwab rep, when I interact with him by phone or email, I can put a face with the name and I feel like I know him a little. With Vanguard, there are no branch offices. My relationship with whatever rep is currently assigned to me has been much more superficial and impersonal.
Recently, fellow HumbleDollar contributor Dennis Friedman wrote about his Vanguard financial advisor. He was generally happy with his advisor, and Vanguard���s comparatively low fees for this service are obviously a big plus. I asked Dennis if the impossibility of face-to-face meetings was an issue for him and he said not at all.
That made me think of a recent experience I had with an insurance broker. The broker assisted my wife and me with Medigap insurance and Part D prescription drug plans. I had set out to find a broker with a local office whom I could meet in person. But I was so impressed with an insurance broker located in Dallas���200 miles away���and with whom I only interacted by email, phone and Zoom, that I went with him. So far, it���s been a smooth and entirely satisfactory relationship.
Despite that, with a fulltime financial advisor���if and when I get to the point of hiring one���I confess to still having doubts. This may be a vestige of my pre-internet self. But when it comes to the person handling my family���s entire assets, I���d still like to be able to look ���em in the eye.
For many years, I���ve split our investments between Charles Schwab and Vanguard Group, and think highly of both outfits. But Schwab has always had a more personal touch. I���ve long had a representative there with whom I���ve occasionally met in person, made possible by the fact that Schwab has branch offices in my city, as it does all over the country. Even though it���s now been several years since I sat down with my Schwab rep, when I interact with him by phone or email, I can put a face with the name and I feel like I know him a little. With Vanguard, there are no branch offices. My relationship with whatever rep is currently assigned to me has been much more superficial and impersonal.
Recently, fellow HumbleDollar contributor Dennis Friedman wrote about his Vanguard financial advisor. He was generally happy with his advisor, and Vanguard���s comparatively low fees for this service are obviously a big plus. I asked Dennis if the impossibility of face-to-face meetings was an issue for him and he said not at all.
That made me think of a recent experience I had with an insurance broker. The broker assisted my wife and me with Medigap insurance and Part D prescription drug plans. I had set out to find a broker with a local office whom I could meet in person. But I was so impressed with an insurance broker located in Dallas���200 miles away���and with whom I only interacted by email, phone and Zoom, that I went with him. So far, it���s been a smooth and entirely satisfactory relationship.
Despite that, with a fulltime financial advisor���if and when I get to the point of hiring one���I confess to still having doubts. This may be a vestige of my pre-internet self. But when it comes to the person handling my family���s entire assets, I���d still like to be able to look ���em in the eye.
The post Personal Touch appeared first on HumbleDollar.
Whither Inflation?
THE RAGING DEBATE of 2021 is whether the inflation we���ve been experiencing this year will be transitory or more permanent. The Federal Reserve���s official stance is that the spike in inflation is a perfect storm of pent-up demand, supply-chain disruptions and year-over-year comparisons that are ���inflated��� relative to 2020���s pandemic-induced deflation, and eventually will revert to more normal levels.
Recent hotter than expected inflation data���including the consumer price index (CPI), producer price index (PPI), U.S. import and export prices and the Fed���s preferred measure, personal consumption expenditures (PCE)���have thrown a monkey wrench into the Fed���s transitory thesis. Even the Fed seems to be having doubts.
Over the past 12 months, consumer prices rose 5.4%. You have to go back nearly 40 years, to 1982, to find sustained levels of CPI of more than 5%. Core CPI (CPI minus volatile food and energy prices) is up 4.5% over the past year. It���s been 25 years since it was last above 3%. In other words, few economists today remember a time when inflation was a serious threat.
Is it possible that expectations for inflation have been powerfully biased to the downside by the past four decades of calm and waning inflation? Fed Chair Jerome Powell, who is age 68, didn���t begin his career in finance until 1984. Just as some people make investment decisions through a rearview mirror, isn���t it possible that economists are susceptible to the same ailment?
Last November, I expressed concern that inflation was a greater risk than ever before, at least in my (short) investing career. My fear stemmed from the teachings of the late economist Milton Friedman, who said, ���Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.���
To understand why, consider the board game Monopoly. At the beginning of the game, a set amount of money is distributed to each player. The object of the game is to amass the greatest amount of money by buying up properties and charging fellow players rent when they land on your property. Imagine the rules were modified so that everyone received twice as much cash as usual at the start of the game, and also received $400 instead of $200 when passing ���Go.��� Furthermore, let���s assume that properties were sold to the highest bidder. It doesn���t require a PhD in economics to realize that property prices would soar. That is, inflation would take hold.
To the surprise of many, years of quantitative easing���the Fed���s moves to lower interest rates and encourage economic activity���failed to move the needle on inflation. Putting massive quantities of money in circulation failed to stoke inflation on Main Street, although it likely led to inflated asset prices on Wall Street. Theories abound for why this occurred. But to me, the most convincing explanation is that the excess cash failed to circulate in the real economy���what economists refer to as money velocity. Going back to our Monopoly analogy, it would be like printing more money but keeping it at the bank rather than in players��� hands.
This dynamic changed once ���helicopter money��� rained down from the sky in the form of stimulus checks and other fiscal largess. Money supply as measured by M1���the sum of currency, checking accounts and demand deposits���has quintupled since the beginning of the pandemic, pushing prices higher.
Won���t inflation subside once these extreme monetary and fiscal measures are withdrawn? Perhaps. But like many things in finance, psychology and behavior play a role, too. Should inflation expectations be anchored higher, inflation could become a self-fulfilling prophecy. When people begin to expect higher prices, they make purchases sooner rather than later, which drives up demand and fuels even more inflation. Once such an inflationary mindset takes hold, this dynamic can be difficult to break.
A great deal hangs in the balance in the inflation debate. Inflation is a silent thief, confiscating people���s purchasing power over time. Ronald Reagan was more direct, calling inflation ���as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.��� Inflation also is the great enemy of bonds and other fixed-income investments. With the exception of TIPS, or Treasury inflation-protected securities, inflation can wreak havoc on returns.
Stocks aren���t necessarily immune to higher inflation. All else being equal, higher interest rates make bonds more attractive than stocks, depressing share prices. Higher interest rates resulting from a robustly growing economy are one thing. But when inflation is stoked by monetary and fiscal policies aimed at reviving moribund growth, the real danger for stocks is stagflation���low growth and high inflation. This would be an especially toxic brew for U.S. stocks, which are currently priced for perfection.
John Lim is a physician and author of "How to Raise Your Child's Financial IQ," which is available as both a free PDF and a Kindle edition.��Follow John on Twitter @JohnTLim��and check out his earlier articles.
Recent hotter than expected inflation data���including the consumer price index (CPI), producer price index (PPI), U.S. import and export prices and the Fed���s preferred measure, personal consumption expenditures (PCE)���have thrown a monkey wrench into the Fed���s transitory thesis. Even the Fed seems to be having doubts.
Over the past 12 months, consumer prices rose 5.4%. You have to go back nearly 40 years, to 1982, to find sustained levels of CPI of more than 5%. Core CPI (CPI minus volatile food and energy prices) is up 4.5% over the past year. It���s been 25 years since it was last above 3%. In other words, few economists today remember a time when inflation was a serious threat.
Is it possible that expectations for inflation have been powerfully biased to the downside by the past four decades of calm and waning inflation? Fed Chair Jerome Powell, who is age 68, didn���t begin his career in finance until 1984. Just as some people make investment decisions through a rearview mirror, isn���t it possible that economists are susceptible to the same ailment?
Last November, I expressed concern that inflation was a greater risk than ever before, at least in my (short) investing career. My fear stemmed from the teachings of the late economist Milton Friedman, who said, ���Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.���
To understand why, consider the board game Monopoly. At the beginning of the game, a set amount of money is distributed to each player. The object of the game is to amass the greatest amount of money by buying up properties and charging fellow players rent when they land on your property. Imagine the rules were modified so that everyone received twice as much cash as usual at the start of the game, and also received $400 instead of $200 when passing ���Go.��� Furthermore, let���s assume that properties were sold to the highest bidder. It doesn���t require a PhD in economics to realize that property prices would soar. That is, inflation would take hold.
To the surprise of many, years of quantitative easing���the Fed���s moves to lower interest rates and encourage economic activity���failed to move the needle on inflation. Putting massive quantities of money in circulation failed to stoke inflation on Main Street, although it likely led to inflated asset prices on Wall Street. Theories abound for why this occurred. But to me, the most convincing explanation is that the excess cash failed to circulate in the real economy���what economists refer to as money velocity. Going back to our Monopoly analogy, it would be like printing more money but keeping it at the bank rather than in players��� hands.
This dynamic changed once ���helicopter money��� rained down from the sky in the form of stimulus checks and other fiscal largess. Money supply as measured by M1���the sum of currency, checking accounts and demand deposits���has quintupled since the beginning of the pandemic, pushing prices higher.
Won���t inflation subside once these extreme monetary and fiscal measures are withdrawn? Perhaps. But like many things in finance, psychology and behavior play a role, too. Should inflation expectations be anchored higher, inflation could become a self-fulfilling prophecy. When people begin to expect higher prices, they make purchases sooner rather than later, which drives up demand and fuels even more inflation. Once such an inflationary mindset takes hold, this dynamic can be difficult to break.
A great deal hangs in the balance in the inflation debate. Inflation is a silent thief, confiscating people���s purchasing power over time. Ronald Reagan was more direct, calling inflation ���as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.��� Inflation also is the great enemy of bonds and other fixed-income investments. With the exception of TIPS, or Treasury inflation-protected securities, inflation can wreak havoc on returns.
Stocks aren���t necessarily immune to higher inflation. All else being equal, higher interest rates make bonds more attractive than stocks, depressing share prices. Higher interest rates resulting from a robustly growing economy are one thing. But when inflation is stoked by monetary and fiscal policies aimed at reviving moribund growth, the real danger for stocks is stagflation���low growth and high inflation. This would be an especially toxic brew for U.S. stocks, which are currently priced for perfection.
John Lim is a physician and author of "How to Raise Your Child's Financial IQ," which is available as both a free PDF and a Kindle edition.��Follow John on Twitter @JohnTLim��and check out his earlier articles.The post Whither Inflation? appeared first on HumbleDollar.
August 1, 2021
Save First
IT'S A TOPIC WHERE I always seem to be in the minority. The controversy: Should you save first and then spend what remains���or, instead, prepare a budget which then determines how much you can ���afford��� to save?
Budgets are scary and stressful. Go ahead, make a budget if you like. But if you conclude that you can���t afford to save, there���s no progress in that.
A Northwestern Mutual survey found that 49% of U.S. adults say they don���t have a clear idea of how much they can afford to spend now and how much they should be saving for later. Need greater clarity? I���ll clear it up: Start by saving 15% of your gross income.
���Afford to spend��� is an interesting phrase. My contention: You can afford to spend what���s left after you save a significant portion of your gross income. What you can���t afford to do is spend more than that.
What if you save 15% of gross income and you can���t support your lifestyle with what���s left? You have to look at your spending and determine what needs to change���fewer lottery tickets perhaps, a smaller car payment, dine in rather than out, leave more of the junk food on the grocery shelf. In general, what you need is a little less discretionary spending.
You���re living paycheck to paycheck, you say? So does Elton John, I hear. For all but the lowest-income Americans, that problem reflects the amount of their spending, not the size of their income.
The post Save First appeared first on HumbleDollar.
July’s Hits
IT WAS A BUSY��JULY here at HumbleDollar. We revamped the homepage and launched our new blog��featuring shorter pieces. But what about our regular, somewhat longer articles? Here were last month's seven most popular:
Want to reduce the risk that a cyber-thief empties your financial accounts? David Powell offers a five-step protection plan.
What estate planning missteps should you strive mightily to avoid? Drawing on decades of experience, attorney Robert Port offers nine crucial lessons.
How much of a stock portfolio should you invest abroad? John Lim is at 85% international���because he believes U.S. stocks are wildly overpriced.
When you leave fulltime work, you lose daily contact with colleagues. How will you replace that? During his semi-retirement, James McGlynn has discovered four new communities.
"For retirees, what matters isn���t the size of their nest egg, but the lifestyle it can support���and I fear $1 million won���t support the lifestyle it once did," writes Aaron Brask.
Dennis Friedman likes to hide cash around the house���but he doesn't like it sitting in his portfolio. Sound odd? Dennis explains his thinking.
"The goal is to move toward financial independence in the first half of life," advises Joe Kesler. "It���s wonderful to have resources set aside so we have the freedom to reinvent ourselves."
What about our��new blog? Among July's posts, the two most popular were Getting Short and Picking the Fruit. Meanwhile, the two most widely read newsletters were Keeping Our Heads and Why We Struggle. And what about Voices? The most popular questions asked readers about their favorite financial books and about what they'd change about their life if money were no object.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier��articles.
Want to reduce the risk that a cyber-thief empties your financial accounts? David Powell offers a five-step protection plan.
What estate planning missteps should you strive mightily to avoid? Drawing on decades of experience, attorney Robert Port offers nine crucial lessons.
How much of a stock portfolio should you invest abroad? John Lim is at 85% international���because he believes U.S. stocks are wildly overpriced.
When you leave fulltime work, you lose daily contact with colleagues. How will you replace that? During his semi-retirement, James McGlynn has discovered four new communities.
"For retirees, what matters isn���t the size of their nest egg, but the lifestyle it can support���and I fear $1 million won���t support the lifestyle it once did," writes Aaron Brask.
Dennis Friedman likes to hide cash around the house���but he doesn't like it sitting in his portfolio. Sound odd? Dennis explains his thinking.
"The goal is to move toward financial independence in the first half of life," advises Joe Kesler. "It���s wonderful to have resources set aside so we have the freedom to reinvent ourselves."
What about our��new blog? Among July's posts, the two most popular were Getting Short and Picking the Fruit. Meanwhile, the two most widely read newsletters were Keeping Our Heads and Why We Struggle. And what about Voices? The most popular questions asked readers about their favorite financial books and about what they'd change about their life if money were no object.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier��articles.The post July’s Hits appeared first on HumbleDollar.
Submerging Markets
JULY WAS ANOTHER positive month for U.S. stocks, which gained 1.7%. But overseas markets were down 1.4%, with emerging markets faring even worse, tumbling 5.9%.
Last week, the Chinese government clamped down on its education and technology industries, sparking a sharp selloff. The return of Vanguard FTSE Emerging Markets ETF (symbol: VWO), which is 40% Chinese stocks, briefly turned negative for the year, while U.S. stocks continue to sport year-to-date gains of more than 15%. Sentiment is so bearish that The Economist featured emerging markets on its cover this weekend.
The prudent course of action is to rebalance your portfolio once or twice a year to ensure your asset allocation fits with your long-term goals. Emerging markets comprise about 11% of the total world stock market, as measured by Vanguard Total World Stock ETF (VT). Straying from that number is effectively an active bet for or against emerging markets. When analyzing your portfolio���s composition, keep in mind that broader international funds may have a significant allocation to emerging markets.
Volatility in any one market segment can prompt investors to question their allocation. While this past week���s steep decline in emerging markets is no more than a blip, it���s been many months since we���ve seen that sort of short-term hit in the stock market. It���s a little reminder to always keep a long-term focus when the headlines turn scary.
Last week, the Chinese government clamped down on its education and technology industries, sparking a sharp selloff. The return of Vanguard FTSE Emerging Markets ETF (symbol: VWO), which is 40% Chinese stocks, briefly turned negative for the year, while U.S. stocks continue to sport year-to-date gains of more than 15%. Sentiment is so bearish that The Economist featured emerging markets on its cover this weekend.
The prudent course of action is to rebalance your portfolio once or twice a year to ensure your asset allocation fits with your long-term goals. Emerging markets comprise about 11% of the total world stock market, as measured by Vanguard Total World Stock ETF (VT). Straying from that number is effectively an active bet for or against emerging markets. When analyzing your portfolio���s composition, keep in mind that broader international funds may have a significant allocation to emerging markets.
Volatility in any one market segment can prompt investors to question their allocation. While this past week���s steep decline in emerging markets is no more than a blip, it���s been many months since we���ve seen that sort of short-term hit in the stock market. It���s a little reminder to always keep a long-term focus when the headlines turn scary.
The post Submerging Markets appeared first on HumbleDollar.
Wedding Gift
ON THE SURFACE, Social Security seems straightforward: During our working years, we pay into the system. Then, when we���re older, the government sends a check every month for life.
But scratch the surface and you���ll find that Social Security offers a number of additional benefits. Among them: a benefit for spouses. This can be highly valuable, but the rules around it are complex and very specific. Consider, for example, the late talk show host Johnny Carson.
Carson was married four times. First, he married Jody Wolcott. They were together for about 15 years. Then he married Joanne Copeland. That marriage lasted nine years. Next came Joanna Holland. They also were married about 15 years. Finally, Carson married Alexis Maas. They had been married 18 years when Carson died in 2005.
Because of the spousal benefit rules, two of Carson���s wives received partial benefits, one received a substantial benefit and one received no benefit at all. To be sure, Carson���s case was unusual. But if you���re married, divorced or widowed, it���s important to understand how spousal benefits work.
By way of background, the original intention of the spousal benefit was to protect stay-at-home spouses. Here���s why: For a worker to be eligible for Social Security, he or she needs to have accumulated at least 40 quarters���totaling 10 years���of work history. But many stay-at-home spouses don���t have 40 quarters. The spousal benefit was designed to ensure they���d receive at least some��benefit, regardless of work history. Here are 10 additional points about spousal benefits:
1. Newlyweds aren���t eligible.��To claim a spousal benefit, you need to have been married for at least a year.
2. In very general terms, the spousal benefit is equal to half of the higher earning spouse���s benefit.��To illustrate, consider the couple Tom and Jane. If Tom is entitled to $2,000 per month, Jane would be entitled to $1,000. It���s more involved than that, as I���ll explain below, but that���s the general idea.
3. More specifically, the spousal benefit is calculated as 50% of the higher-earning spouse���s��primary insurance amount��(PIA).��The PIA, in turn, represents the amount you���re entitled to at your full Social Security retirement age (FRA), which is between age 65 and 67, depending on the��year you were born. For that reason, the spousal benefit doesn���t always equal 50% of the��actual��benefit the higher-income spouse is receiving. For example, if the higher-income spouse waits until age 70 to claim benefits, the spousal benefit wouldn���t be half of that very robust number. It could be as much as 25% lower.
4. The spousal benefit can only help.��In the above example, Tom and Jane would collect a combined $3,000. In other words, one benefit is not deducted from the other.
5. The spousal benefit is an option, but certainly not mandatory.��Let���s look at Jane and Tom again. Jane is entitled to $1,000 as a spousal benefit. But should she take it? In the simplest case, if Jane had no earnings record of her own, she would of course claim that $1,000 benefit.
But suppose Jane was entitled to a benefit on her own record. In that case, she still might choose the spousal benefit���but it would be a choice. To decide, she would simply weigh her own benefit against the prospective spousal benefit. Suppose Jane���s own benefit was $750 per month. In that case, the spousal benefit of $1,000 would still be the better way to go.
Now, imagine that Jane���s benefit, based on her own earnings record, was��more��than $1,000. In that situation, she���d want to stick with her own benefit. In fact, if she had earned significantly more than Tom, it might be Tom who���d collect the spousal benefit based on Jane���s work history. In short, the spousal benefit is just an option, provided only as a floor but not as a ceiling.
6. To claim a spousal benefit, your spouse must have already claimed his or her own benefit.��In the above example, if Jane were going to choose the spousal option, she would need to wait until Tom had started his benefit. On the other hand, if they were each going to claim their own benefit based on their own earnings history, they could choose independently when to start.
7. The timing of spousal benefits should be coordinated��carefully.��As you probably know, there���s a benefit to delaying Social Security benefits. While you can claim as early as age 62, you can maximize your benefit if you wait until 70. With spousal benefits, it���s similar, but more restrictive. You can still claim as early as 62���provided your spouse has already started benefits, as noted above.
But the penalty for claiming a spousal benefit prior to FRA is steeper than the penalty for claiming your own benefit early. For example, if you claim your own benefit three years prior to FRA, your benefit would be reduced by 20%. But if you claim your��spousal��benefit three years prior to FRA, that benefit would be reduced by 25%.
At the same time, you definitely don���t want to wait until 70. That���s because spousal benefits hit a maximum when you reach your full Social Security retirement age and don���t grow any further. Bottom line: Ideally, you would claim your spousal benefit right at your FRA.
8. In 2015, Congress overhauled the spousal benefit rules to close a loophole known as the ���restricted application.�����If you were born before Jan. 2, 1954, you���re grandfathered in. But for everyone else, it���s now a pothole to be aware of.
Consider the couple Michael and Susan. Michael is two years older than Susan. They both have strong earnings records, so they're both planning to wait until age 70 to claim their own benefits, which will be $4,000 for each at that time. Under the old rules, Michael and Susan could coordinate: He could start his $4,000 benefit at age 70. At the same time, Susan, at 68, could claim the spousal benefit, which would be about $1,500. She could collect that amount for two years, until turning age 70. Then she could switch over to her own $4,000 benefit. In other words, Susan could collect a check, albeit smaller, for two years while her own benefit keeps growing.
Unfortunately, because this was such a generous policy, Congress eliminated it. If you happen to fit in that narrow band of folks still eligible, be sure to look into it. On the other hand, if you were born after Jan. 1, 1954, you may want to do the opposite and��avoid��filing for spousal benefits in a situation like this. Under the new rules, that could inadvertently, and permanently, reduce your own benefit.
9. There���s one other exception to the new restricted application rule.��If you���re widowed, you���re allowed to employ the restricted application strategy, even if you were born after Jan. 1, 1954.
10. If you���re divorced, the rules and benefits are similar to what they would have been if you were still married.��But there are some differences. Most important, if you want to claim a spousal benefit based on your ex-spouse���s record, you need to have been married for 10 years. That���s why Johnny Carson���s second wife, to whom he was married for just nine years, received no benefit at all. Also, divorced spouses aren���t subject to the restriction described in No. 6 above. Social Security recognizes that former spouses may not necessarily coordinate benefits, so it doesn���t make them dependent on each other.
These are just the most basic points about spousal benefits. While Social Security does offer a ���do over��� option, this is definitely an area where���as the saying goes���you want to measure twice and cut once.
Adam M. Grossman��is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman��and check out his earlier articles.
But scratch the surface and you���ll find that Social Security offers a number of additional benefits. Among them: a benefit for spouses. This can be highly valuable, but the rules around it are complex and very specific. Consider, for example, the late talk show host Johnny Carson.
Carson was married four times. First, he married Jody Wolcott. They were together for about 15 years. Then he married Joanne Copeland. That marriage lasted nine years. Next came Joanna Holland. They also were married about 15 years. Finally, Carson married Alexis Maas. They had been married 18 years when Carson died in 2005.
Because of the spousal benefit rules, two of Carson���s wives received partial benefits, one received a substantial benefit and one received no benefit at all. To be sure, Carson���s case was unusual. But if you���re married, divorced or widowed, it���s important to understand how spousal benefits work.
By way of background, the original intention of the spousal benefit was to protect stay-at-home spouses. Here���s why: For a worker to be eligible for Social Security, he or she needs to have accumulated at least 40 quarters���totaling 10 years���of work history. But many stay-at-home spouses don���t have 40 quarters. The spousal benefit was designed to ensure they���d receive at least some��benefit, regardless of work history. Here are 10 additional points about spousal benefits:
1. Newlyweds aren���t eligible.��To claim a spousal benefit, you need to have been married for at least a year.
2. In very general terms, the spousal benefit is equal to half of the higher earning spouse���s benefit.��To illustrate, consider the couple Tom and Jane. If Tom is entitled to $2,000 per month, Jane would be entitled to $1,000. It���s more involved than that, as I���ll explain below, but that���s the general idea.
3. More specifically, the spousal benefit is calculated as 50% of the higher-earning spouse���s��primary insurance amount��(PIA).��The PIA, in turn, represents the amount you���re entitled to at your full Social Security retirement age (FRA), which is between age 65 and 67, depending on the��year you were born. For that reason, the spousal benefit doesn���t always equal 50% of the��actual��benefit the higher-income spouse is receiving. For example, if the higher-income spouse waits until age 70 to claim benefits, the spousal benefit wouldn���t be half of that very robust number. It could be as much as 25% lower.
4. The spousal benefit can only help.��In the above example, Tom and Jane would collect a combined $3,000. In other words, one benefit is not deducted from the other.
5. The spousal benefit is an option, but certainly not mandatory.��Let���s look at Jane and Tom again. Jane is entitled to $1,000 as a spousal benefit. But should she take it? In the simplest case, if Jane had no earnings record of her own, she would of course claim that $1,000 benefit.
But suppose Jane was entitled to a benefit on her own record. In that case, she still might choose the spousal benefit���but it would be a choice. To decide, she would simply weigh her own benefit against the prospective spousal benefit. Suppose Jane���s own benefit was $750 per month. In that case, the spousal benefit of $1,000 would still be the better way to go.
Now, imagine that Jane���s benefit, based on her own earnings record, was��more��than $1,000. In that situation, she���d want to stick with her own benefit. In fact, if she had earned significantly more than Tom, it might be Tom who���d collect the spousal benefit based on Jane���s work history. In short, the spousal benefit is just an option, provided only as a floor but not as a ceiling.
6. To claim a spousal benefit, your spouse must have already claimed his or her own benefit.��In the above example, if Jane were going to choose the spousal option, she would need to wait until Tom had started his benefit. On the other hand, if they were each going to claim their own benefit based on their own earnings history, they could choose independently when to start.
7. The timing of spousal benefits should be coordinated��carefully.��As you probably know, there���s a benefit to delaying Social Security benefits. While you can claim as early as age 62, you can maximize your benefit if you wait until 70. With spousal benefits, it���s similar, but more restrictive. You can still claim as early as 62���provided your spouse has already started benefits, as noted above.
But the penalty for claiming a spousal benefit prior to FRA is steeper than the penalty for claiming your own benefit early. For example, if you claim your own benefit three years prior to FRA, your benefit would be reduced by 20%. But if you claim your��spousal��benefit three years prior to FRA, that benefit would be reduced by 25%.
At the same time, you definitely don���t want to wait until 70. That���s because spousal benefits hit a maximum when you reach your full Social Security retirement age and don���t grow any further. Bottom line: Ideally, you would claim your spousal benefit right at your FRA.
8. In 2015, Congress overhauled the spousal benefit rules to close a loophole known as the ���restricted application.�����If you were born before Jan. 2, 1954, you���re grandfathered in. But for everyone else, it���s now a pothole to be aware of.
Consider the couple Michael and Susan. Michael is two years older than Susan. They both have strong earnings records, so they're both planning to wait until age 70 to claim their own benefits, which will be $4,000 for each at that time. Under the old rules, Michael and Susan could coordinate: He could start his $4,000 benefit at age 70. At the same time, Susan, at 68, could claim the spousal benefit, which would be about $1,500. She could collect that amount for two years, until turning age 70. Then she could switch over to her own $4,000 benefit. In other words, Susan could collect a check, albeit smaller, for two years while her own benefit keeps growing.
Unfortunately, because this was such a generous policy, Congress eliminated it. If you happen to fit in that narrow band of folks still eligible, be sure to look into it. On the other hand, if you were born after Jan. 1, 1954, you may want to do the opposite and��avoid��filing for spousal benefits in a situation like this. Under the new rules, that could inadvertently, and permanently, reduce your own benefit.
9. There���s one other exception to the new restricted application rule.��If you���re widowed, you���re allowed to employ the restricted application strategy, even if you were born after Jan. 1, 1954.
10. If you���re divorced, the rules and benefits are similar to what they would have been if you were still married.��But there are some differences. Most important, if you want to claim a spousal benefit based on your ex-spouse���s record, you need to have been married for 10 years. That���s why Johnny Carson���s second wife, to whom he was married for just nine years, received no benefit at all. Also, divorced spouses aren���t subject to the restriction described in No. 6 above. Social Security recognizes that former spouses may not necessarily coordinate benefits, so it doesn���t make them dependent on each other.
These are just the most basic points about spousal benefits. While Social Security does offer a ���do over��� option, this is definitely an area where���as the saying goes���you want to measure twice and cut once.
Adam M. Grossman��is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman��and check out his earlier articles.The post Wedding Gift appeared first on HumbleDollar.
July 31, 2021
Looking Further
IN MID-MARCH 2020, a friend and I were anxiously discussing the financial ramifications of the evolving pandemic. I posited the following question to him: Suppose the stock exchanges announced that they���d be shutting down for six months, starting the day after tomorrow. What do you think would happen to the stock market on its final trading day before closing?
Answering my own rhetorical question, I said it wouldn���t surprise me if markets paradoxically staged a huge rally���upward of 20%���the day before shutting down. Why? I reckoned market participants would be forced to look ahead 12 to 18 months, by which time COVID-19 would be more or less contained.
Many investors were flummoxed by the stock market���s violent rally off the March 2020 bottom. But they shouldn���t have been. We know that financial markets are by nature forward-looking. The stock market today reflects the state of business and the economy six to 12 months into the future.
Suppose my thought experiment had become reality���and financial markets had shuttered in March 2020. By the time they reopened six months later, in September 2020, stock prices would reflect financial conditions in 2021 or even early 2022, when the economy would likely be on the mend. But instead of waiting for markets to reopen in September, investors would have acted immediately by bidding up share prices to reflect this expected economic rebound. Such is the nature of efficient markets.
Of course, we���ll never know the answer to my thought experiment. Markets didn���t close down. But here���s my point: Looking further into the future than most investors are willing to do is the essence of being a successful, long-term investor. This doesn���t mean having stock market clairvoyance. But it does mean looking beyond present-day turmoil and heeding the proverb, ���This too shall pass.���
Answering my own rhetorical question, I said it wouldn���t surprise me if markets paradoxically staged a huge rally���upward of 20%���the day before shutting down. Why? I reckoned market participants would be forced to look ahead 12 to 18 months, by which time COVID-19 would be more or less contained.
Many investors were flummoxed by the stock market���s violent rally off the March 2020 bottom. But they shouldn���t have been. We know that financial markets are by nature forward-looking. The stock market today reflects the state of business and the economy six to 12 months into the future.
Suppose my thought experiment had become reality���and financial markets had shuttered in March 2020. By the time they reopened six months later, in September 2020, stock prices would reflect financial conditions in 2021 or even early 2022, when the economy would likely be on the mend. But instead of waiting for markets to reopen in September, investors would have acted immediately by bidding up share prices to reflect this expected economic rebound. Such is the nature of efficient markets.
Of course, we���ll never know the answer to my thought experiment. Markets didn���t close down. But here���s my point: Looking further into the future than most investors are willing to do is the essence of being a successful, long-term investor. This doesn���t mean having stock market clairvoyance. But it does mean looking beyond present-day turmoil and heeding the proverb, ���This too shall pass.���
The post Looking Further appeared first on HumbleDollar.
Cold Comfort
IT HAD BEEN A WHILE since we���d last shopped for a refrigerator. There was a time when such an appliance merely kept things cold and, for me, fancy meant the fridge could deliver crushed ice for my iced tea.
But today, there are all kinds of features. French-door style. Sub-area climate controls. The big new thing: see-through doors so you can choose without staring into an open fridge���a favorite pastime of my youth on hot Texas days.
You can easily pay thousands. We hunted for deals. We looked at seconds and at closeout stores. There wasn���t much, thanks to worldwide supply chain disruptions.
We ended up at Home Depot and Lowe���s, plaintively asking, ���What have you got?��� Many of the online deals are on backorder, with delivery times measured in months. We were moving in a week and needed a fridge sooner. Even the ones they had in a regional warehouse would take weeks to deliver.
We discovered the key was asking what they had at individual stores. Neither Home Depot nor Lowe���s would sell floor models. But every store has some appliances that either had been returned by customers or had arrived from the warehouse dented or scratched.
We weren���t concerned about the aesthetics of our cold storage. The offending mark might be on the side facing the counter and, even if it wasn���t, we figured we could cover it with refrigerator art (though we���re at that awkward parenting stage where our sons are too old to do art and we don���t yet have grandchildren). One drawback: Home Depot didn���t offer free delivery for damaged fridges, but Lowe���s did at some stores.
We ended up getting a nice Frigidaire 26-cubic-foot side-by-side refrigerator with a small dent at the front bottom. The normal price is $1,300. But we got it for $650, including free delivery, and I got my crushed ice.
But today, there are all kinds of features. French-door style. Sub-area climate controls. The big new thing: see-through doors so you can choose without staring into an open fridge���a favorite pastime of my youth on hot Texas days.
You can easily pay thousands. We hunted for deals. We looked at seconds and at closeout stores. There wasn���t much, thanks to worldwide supply chain disruptions.
We ended up at Home Depot and Lowe���s, plaintively asking, ���What have you got?��� Many of the online deals are on backorder, with delivery times measured in months. We were moving in a week and needed a fridge sooner. Even the ones they had in a regional warehouse would take weeks to deliver.
We discovered the key was asking what they had at individual stores. Neither Home Depot nor Lowe���s would sell floor models. But every store has some appliances that either had been returned by customers or had arrived from the warehouse dented or scratched.
We weren���t concerned about the aesthetics of our cold storage. The offending mark might be on the side facing the counter and, even if it wasn���t, we figured we could cover it with refrigerator art (though we���re at that awkward parenting stage where our sons are too old to do art and we don���t yet have grandchildren). One drawback: Home Depot didn���t offer free delivery for damaged fridges, but Lowe���s did at some stores.
We ended up getting a nice Frigidaire 26-cubic-foot side-by-side refrigerator with a small dent at the front bottom. The normal price is $1,300. But we got it for $650, including free delivery, and I got my crushed ice.
The post Cold Comfort appeared first on HumbleDollar.
Park Place
OUR SOUTH JERSEY beach town transforms from empty to overrun during the summer. This past July 4th weekend was one of the busiest many of us had ever experienced. On these occasions, parking spaces go from a mass-produced commodity to the rarest of diamonds.
We had company for the weekend, so we had to park four cars instead of the usual three. Before the weekend, we grabbed a desirable spot in front of our house and vowed never to move it. I carefully squeezed our remaining two cars into our two rear parking spots, leaving just enough room for a third car to park perpendicular, blocking the other two cars. All weekend, we kept an eye on the street, just in case a prime spot opened up. When one did, my wife grabbed one car and tried to snag it, only to be outdone by a passing SUV. We were crushed.
Looking back, it���s hard to believe how much time and energy we spent worrying about parking���and how much pride we felt over successfully managing the parking situation. But then I think about how I stocked up at the beginning of the pandemic, including buying cases of paper goods, hundreds of coffee K-Cups and freezers full of meat. Clearly, perceived scarcity creates economic stress���and decision-making often suffers when we feel stressed.
Was my reaction appropriate? Maybe organizing our weekend parking didn���t require a plan comparable to the Apollo program. It���s worth examining our behavior in such situations, especially those that are of so little consequence.
That brings me to a second question. Was our perception of the scarcity accurate? There were shortages of some important items at the beginning of pandemic and it is indeed tough to park in our beach town on summer weekends. But was it as bad as I perceived?
We had company for the weekend, so we had to park four cars instead of the usual three. Before the weekend, we grabbed a desirable spot in front of our house and vowed never to move it. I carefully squeezed our remaining two cars into our two rear parking spots, leaving just enough room for a third car to park perpendicular, blocking the other two cars. All weekend, we kept an eye on the street, just in case a prime spot opened up. When one did, my wife grabbed one car and tried to snag it, only to be outdone by a passing SUV. We were crushed.
Looking back, it���s hard to believe how much time and energy we spent worrying about parking���and how much pride we felt over successfully managing the parking situation. But then I think about how I stocked up at the beginning of the pandemic, including buying cases of paper goods, hundreds of coffee K-Cups and freezers full of meat. Clearly, perceived scarcity creates economic stress���and decision-making often suffers when we feel stressed.
Was my reaction appropriate? Maybe organizing our weekend parking didn���t require a plan comparable to the Apollo program. It���s worth examining our behavior in such situations, especially those that are of so little consequence.
That brings me to a second question. Was our perception of the scarcity accurate? There were shortages of some important items at the beginning of pandemic and it is indeed tough to park in our beach town on summer weekends. But was it as bad as I perceived?
The post Park Place appeared first on HumbleDollar.
