Jonathan Clements's Blog, page 280
July 27, 2021
Double-Edged Sword
WE LOOK AT OUR traditional IRAs each year and decide how much we���ll convert to a Roth IRA. We���re worried our tax rate may increase down the road, either because of tax law changes or because of the extra taxable income once we start taking required minimum IRA distributions at age 72. To head off that threat or at least limit the damage, we���ve been shrinking our traditional IRAs by converting them to Roths, where the money should grow tax-free thereafter.
There���s talk in Washington of making changes to Roth IRAs. These proposals include putting a cap on how much can be held in a Roth or added once it reaches a certain size, removing the ability to put alternative assets into a Roth or possibly eliminating Roth conversions altogether.
Then comes the other part of the equation. If we make a large Roth conversion, which increases our income, we���ll face not just a bigger income tax bill, but also higher Medicare premiums. The bottom line: We���re working with our accountant, trying to figure out where the sweet spot is���and then we���ll make a conversion equal to that amount.
There���s talk in Washington of making changes to Roth IRAs. These proposals include putting a cap on how much can be held in a Roth or added once it reaches a certain size, removing the ability to put alternative assets into a Roth or possibly eliminating Roth conversions altogether.
Then comes the other part of the equation. If we make a large Roth conversion, which increases our income, we���ll face not just a bigger income tax bill, but also higher Medicare premiums. The bottom line: We���re working with our accountant, trying to figure out where the sweet spot is���and then we���ll make a conversion equal to that amount.
The post Double-Edged Sword appeared first on HumbleDollar.
Curb Your Enthusiasm
SERIES I SAVINGS bonds have lately garnered a lot of investor interest because���if you buy during the current six-month purchase period���your initial annualized interest rate will be 3.54%. You���ll only earn that for the first six months. Thereafter, your yield will match the inflation rate. For bonds purchased between May and October,��there's no additional interest paid, over and above the inflation rate.
Still, the higher inflation climbs, the more interest your I bonds will earn. But that doesn���t mean you should cheer for higher inflation. Why not? Whatever the inflation rate, the money you have in Series I savings bonds will leave you with pretty much the same purchasing power because their value rises with inflation. But that, alas, is before federal income taxes. After taxes, the higher the inflation rate, the more you���ll pay in income taxes���and hence the further behind inflation you���ll fall.
In fact, the ideal scenario would be zero inflation. That way, you���d owe zero taxes when you cash in your bonds and thus your after-tax return would match the inflation rate. But with every tick higher in inflation, the value of your I bonds will also tick higher���and you���ll owe more in taxes when you eventually cash them in.
Still, the higher inflation climbs, the more interest your I bonds will earn. But that doesn���t mean you should cheer for higher inflation. Why not? Whatever the inflation rate, the money you have in Series I savings bonds will leave you with pretty much the same purchasing power because their value rises with inflation. But that, alas, is before federal income taxes. After taxes, the higher the inflation rate, the more you���ll pay in income taxes���and hence the further behind inflation you���ll fall.
In fact, the ideal scenario would be zero inflation. That way, you���d owe zero taxes when you cash in your bonds and thus your after-tax return would match the inflation rate. But with every tick higher in inflation, the value of your I bonds will also tick higher���and you���ll owe more in taxes when you eventually cash them in.
The post Curb Your Enthusiasm appeared first on HumbleDollar.
Pondering the Maze
RETIREMENT SAVINGS and decent health insurance are major goals for most Americans. Politicians attempt to help. Yet the resulting laws and regulations are confusing to the point of being counterproductive.
Can the average worker figure all this out? Nope. It���s too complex and unnecessarily so. Lucky Americans may get help from an employer, but many folks are on their own. Consider seven examples:
1. You can contribute up to $19,500 to a 401(k) in 2021 if you���re under age 50. But save in an IRA, and you���re limited to $6,000. What if you use a SEP IRA or solo 401(k)? The limit is $58,000.
2. Reach age 50 and you can ���catch up��� on contributions���but not equally. For a 401(k), it���s $6,500 per year, while a SIMPLE IRA is limited to $3,000 and an IRA $1,000. It gets curiouser and curiouser.
3. You���re eligible to partially or fully fund a Roth IRA in 2021 if your modified adjusted gross income (MAGI) doesn���t exceed $140,000. But if you're married and file jointly, your MAGI must be under $208,000. Only in the government���s world does $140,000 multiplied by two equal $208,000.
4. You never forfeit unused money in health savings accounts and health reimbursement accounts, but you do so with a flexible spending account. Somewhere in that mess is a bit of logic, I assume.
5. Contributions via an employer to health savings accounts and flexible spending accounts are typically exempt from Social Security and Medicare payroll taxes, but contributions to a 401(k) aren���t.
6. You usually can���t take money from an IRA without penalty before age 59��, but you can from a 401(k) if you leave an employer at age 55 or later.
7. Pull money out of a Roth IRA or Roth 401(k) and your earnings should be entirely tax-free once you reach retirement age. But invest in municipal bonds and the resulting tax-free interest can, for retirees, lead to higher Medicare premiums and steeper taxes on their Social Security benefit.
Professionals spend their working life trying to comply with and explain these rules���and all the complexity and the cost of compliance deter employers from offering benefits to employees. Is it any wonder the average American finds saving for retirement and coping with health care costs so daunting?
Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive.��Follow him on Twitter��@QuinnsComments��and check out his earlier��articles.
The post Pondering the Maze appeared first on HumbleDollar.
July 26, 2021
Ill-Gotten Gains?
FOUR OF CANADA���S five biggest banks recently announced they���re going to raise service charges, even though they continue to rake in billions in profits. Taking advantage of people, when they���re struggling to make ends meet during the pandemic, is beyond comprehension���and it���s in direct conflict with my values.
In their defense, the banks stated that the increases were made after careful consideration and that other options were available to customers. This is classic bank-speak. Roughly translated: It means we���ve thought about this carefully and concluded that we can get away with it. We���re confident that, while our customers will whine some, in the end they���ll take it on the chin and not move their business. After all, with our competitors doing it as well, where are they going to go?
The banks aren���t the only companies not walking the talk. Another company I���m invested in likes to tout its strong support for mental health. It even hosts its own annual mental health awareness day. I bought into the good work the company was doing. But less than a week after its special day, it terminated hundreds of people. I���ve experienced termination, along with the depression, embarrassment, and fear of being unable to pay the mortgage and take care of the kids. I can���t see how terminating employees during a pandemic supports mental health.
But if you thought that was bad, the way the company gave notice was brutal. Because of the pandemic and in the name of efficiency, most firings were done either over the phone or via Zoom. The conversations were usually short and to the point. ���Your services are no longer needed. Thank you for your contribution and please clean out your workstation by the end of the week.��� Corporations need to show some compassion���simply because it���s the right thing to do.
The decision I now struggle with: Should I sell shares of these companies that I own? Or is it worth sacrificing my personal values to earn good investment returns?
In their defense, the banks stated that the increases were made after careful consideration and that other options were available to customers. This is classic bank-speak. Roughly translated: It means we���ve thought about this carefully and concluded that we can get away with it. We���re confident that, while our customers will whine some, in the end they���ll take it on the chin and not move their business. After all, with our competitors doing it as well, where are they going to go?
The banks aren���t the only companies not walking the talk. Another company I���m invested in likes to tout its strong support for mental health. It even hosts its own annual mental health awareness day. I bought into the good work the company was doing. But less than a week after its special day, it terminated hundreds of people. I���ve experienced termination, along with the depression, embarrassment, and fear of being unable to pay the mortgage and take care of the kids. I can���t see how terminating employees during a pandemic supports mental health.
But if you thought that was bad, the way the company gave notice was brutal. Because of the pandemic and in the name of efficiency, most firings were done either over the phone or via Zoom. The conversations were usually short and to the point. ���Your services are no longer needed. Thank you for your contribution and please clean out your workstation by the end of the week.��� Corporations need to show some compassion���simply because it���s the right thing to do.
The decision I now struggle with: Should I sell shares of these companies that I own? Or is it worth sacrificing my personal values to earn good investment returns?
The post Ill-Gotten Gains? appeared first on HumbleDollar.
Inflated Anxiety
MY EMPLOYER���S 401(K) plan is great, with a generous matching contribution and lots of investment options. Those looking for even more choice can open a brokerage subaccount within the 401(k), allowing them to buy thousands of securities.
I���ve stayed away from the brokerage option, in part because I feared the extra choice might affect my investment discipline. But my growing anxiety about inflation forced me to reconsider.
I want a predictable cash reserve to cover my expenses for the next 10 years, independent of how the financial markets perform. That���s why a large portion of my 401(k) is invested in Vanguard Short-Term Bond Index Fund (symbol: VBIPX). Problem is, while the fund should hold its own in a broad market decline, it does little to preserve my money���s purchasing power.
Everywhere I look, I���ve been noticing price creep. Initially, I took it as temporary phenomenon, the result of a post-lockdown spending surge. But the inflation spikes of recent months have spooked me. My anxiety kept rising despite the Federal Reserve���s insistence that this was only temporary. I���ve always felt that even the Fed���the expert of experts���has a hard time predicting and controlling inflation.
To tame my anxiety, I opened a brokerage subaccount in my 401(k). The process was simple and quick. In a few days, I was able to raise cash by selling a large portion of my Vanguard Short-Term Bond Index Fund. I used the proceeds to invest in inflation-indexed Treasury bonds through another low-cost Vanguard fund (VTIP).
Was it a good move? My rational self is half-convinced. But my emotional self couldn���t be happier. Sometimes it feels good to have a little insurance.
I���ve stayed away from the brokerage option, in part because I feared the extra choice might affect my investment discipline. But my growing anxiety about inflation forced me to reconsider.
I want a predictable cash reserve to cover my expenses for the next 10 years, independent of how the financial markets perform. That���s why a large portion of my 401(k) is invested in Vanguard Short-Term Bond Index Fund (symbol: VBIPX). Problem is, while the fund should hold its own in a broad market decline, it does little to preserve my money���s purchasing power.
Everywhere I look, I���ve been noticing price creep. Initially, I took it as temporary phenomenon, the result of a post-lockdown spending surge. But the inflation spikes of recent months have spooked me. My anxiety kept rising despite the Federal Reserve���s insistence that this was only temporary. I���ve always felt that even the Fed���the expert of experts���has a hard time predicting and controlling inflation.
To tame my anxiety, I opened a brokerage subaccount in my 401(k). The process was simple and quick. In a few days, I was able to raise cash by selling a large portion of my Vanguard Short-Term Bond Index Fund. I used the proceeds to invest in inflation-indexed Treasury bonds through another low-cost Vanguard fund (VTIP).
Was it a good move? My rational self is half-convinced. But my emotional self couldn���t be happier. Sometimes it feels good to have a little insurance.
The post Inflated Anxiety appeared first on HumbleDollar.
Prophets and Losses
OFTEN WRONG, never in doubt. That describes many economic prognosticators. A rational response: Treat their predictions like hazardous waste���handle with caution, or better yet, don���t handle at all.
Among the countless examples, consider newsletter writer Harry Dent. Armed with a Harvard MBA, Dent makes market predictions that are fantastic and frequently wrong. In late April and more recently in June, he predicted that the market would crash, adding that if he���s wrong, he would quit his job. I���m not holding my breath.
In 1998, Dent published The Roaring 2000s, predicting that the decade was a sure winner. It turned out to be the worst investing decade of my lifetime���by a significant margin. Dent���s The Great Depression Ahead was published in 2009, at the start of the longest bull market in history. In 2011, he doubled down, publishing The Great Crash Ahead. In 2016, Dent wrote The Sale of a Lifetime: How the Great Bubble Bust of 2017 Can Make You Rich.
Such predictions may seem foolish. But it���s all about marketing. Nothing gets eyeballs like doom-and-gloom predictions. Enter ���stock market crash��� on YouTube and compare the number of views for videos predicting financial disaster to others from the same analyst. You���ll invariably find many more views of the crash videos. They cater to the part of our brains that fixates on fear���a learned survival mechanism from our hunter-gatherer ancestors. But the fact is, nobody knows what the future holds for the financial markets.
Among the countless examples, consider newsletter writer Harry Dent. Armed with a Harvard MBA, Dent makes market predictions that are fantastic and frequently wrong. In late April and more recently in June, he predicted that the market would crash, adding that if he���s wrong, he would quit his job. I���m not holding my breath.
In 1998, Dent published The Roaring 2000s, predicting that the decade was a sure winner. It turned out to be the worst investing decade of my lifetime���by a significant margin. Dent���s The Great Depression Ahead was published in 2009, at the start of the longest bull market in history. In 2011, he doubled down, publishing The Great Crash Ahead. In 2016, Dent wrote The Sale of a Lifetime: How the Great Bubble Bust of 2017 Can Make You Rich.
Such predictions may seem foolish. But it���s all about marketing. Nothing gets eyeballs like doom-and-gloom predictions. Enter ���stock market crash��� on YouTube and compare the number of views for videos predicting financial disaster to others from the same analyst. You���ll invariably find many more views of the crash videos. They cater to the part of our brains that fixates on fear���a learned survival mechanism from our hunter-gatherer ancestors. But the fact is, nobody knows what the future holds for the financial markets.
The post Prophets and Losses appeared first on HumbleDollar.
Life���s Two Halves
GROWING UP, I WAS heavily influenced by the ideals of the Protestant work ethic. Working hard and finding career success provided great satisfaction, so I assumed I���d handle the second half of my life in the same way as the first.
This wasn���t a great plan.
I was around age 50 when I came across the writings of psychiatrist Carl Jung and his discussion of the two halves of life. For me, the timing couldn���t have been better. Jung saw that, in the second half of life, it���s no longer enough to find meaning in success. He knew, as we age, we find purpose in different ways than in life���s first half.
Jung summed it up poetically: ���One cannot live the afternoon of life according to the program of life���s morning; for what was great in the morning will be of little importance in the evening, and what in the morning was true will at evening become a lie.��� Jung opened my eyes to seeing our 50s to our 80s as a season of life when we redefine ourselves. We don���t need to hang onto our aspirations from the first half of life.
What happens when we ignore this insight into aging, and try to do the same things in the second half of life that we did in the first half? I suspect this is a root cause of career burnout. Career success doesn���t motivate us in our 50s like it did in our 30s. For most of us, the second half is a time to find significance elsewhere. Using Jung���s insights into aging, here are three ideas on managing the two halves of life.
1. Seek future freedom. There���s a lot of advice given to young people to follow their heart, regardless of money. I wouldn���t argue with that if you felt called to be a missionary in a remote part of the world. Those that have that type of clarity of purpose early in life are fortunate.
But many of us had no idea in our 20s what we wanted to do for the next 30 years. Does anyone imagine today���s 20-somethings have a better handle on that same question?
My contention: Without a clear-cut mission in life, why not follow the money when you���re young? I think I found almost everything interesting in my 20s. I loved rock music and could have become a low-paid roadie. But I also found finance interesting in my 20s. As a banker, I could do interesting work and help people, while also making money and saving for the future. It worked well for me.
The goal is to move toward financial independence in the first half of life. It���s wonderful to have resources set aside so we have the freedom to reinvent ourselves with a more mature sense of purpose.
My point: Unless you have a distinct calling, why not save as much money as you can early in life by pursuing a fulfilling but decently paid career? That way, as you reach your 50s and beyond, you���ll have some capital built up to fund a new path if you find you���re no longer engaged in your career.
2. Find purpose. Even as we age and lose interest in our career, we may still lack focus about a new purpose. Fortunately, there are some exercises we can do to help us.
George Kinder wrote the book The Seven Stages of Money Maturity and trains financial advisors to help clients figure out what they want to do with their life. He suggests three excellent questions to help discover what���s truly important to each of us. I find them great conversation starters for those struggling to find their life���s purpose. Here are paraphrased versions of the three questions:
If you just won $10 million, how would you change your life?
If you found out you have just five years to live, but you���re in good health, what would you do?
If you���re told today that you have only 24 hours to live, what regrets would you have about your life?
Ask a spouse or close friend to spend a little time talking through these types of questions. As you discover hidden aspirations, you might try some of them out. And if you discover these ideas are something you want to pursue, it may open the pathway to a new direction in life.
3. Give back. Consider what you can pass on to others. There���s a big need for mentors in our society. No one is better suited than those of us with some experience and wisdom to share from our life���s first half.
Encore.org is an organization that has recognized that aging is an opportunity for us to redefine who we are as we age. Mentorship is one of those opportunities. Encore.org can assist by connecting those over age 50 with younger folks. Alternatively, if you���re a grandparent, uncle or aunt, you probably don���t need any help finding a mentee.
Religious traditions capture this same insight. We see older men and women in the church transitioning from their first calling to teaching the community���s younger members. These opportunities continue to exist in churches, as well as in many nonprofits.
For those of us still connected to our first-half profession, running development programs can be one of the most rewarding times of our career. I just got a ���thank you��� note from a single mom who graduated with an accounting degree because of the goals she set in a program I led. It���s one thing to succeed ourselves. But it���s hugely gratifying to play some small part in the success of others.
Joe Kesler is the author of
Smart Money with Purpose
and the founder of a
website
with the same name, which is where a version of this article first appeared. He spent 40 years in community banking, assisting small businesses and consumers.��Joe served as chief executive of banks in Illinois and Montana. He currently lives with his wife in Missoula, Montana, spending his time writing on personal finance, serving on two bank boards and hiking in the Rocky Mountains. Check out Joe's previous articles.
This wasn���t a great plan.
I was around age 50 when I came across the writings of psychiatrist Carl Jung and his discussion of the two halves of life. For me, the timing couldn���t have been better. Jung saw that, in the second half of life, it���s no longer enough to find meaning in success. He knew, as we age, we find purpose in different ways than in life���s first half.
Jung summed it up poetically: ���One cannot live the afternoon of life according to the program of life���s morning; for what was great in the morning will be of little importance in the evening, and what in the morning was true will at evening become a lie.��� Jung opened my eyes to seeing our 50s to our 80s as a season of life when we redefine ourselves. We don���t need to hang onto our aspirations from the first half of life.
What happens when we ignore this insight into aging, and try to do the same things in the second half of life that we did in the first half? I suspect this is a root cause of career burnout. Career success doesn���t motivate us in our 50s like it did in our 30s. For most of us, the second half is a time to find significance elsewhere. Using Jung���s insights into aging, here are three ideas on managing the two halves of life.
1. Seek future freedom. There���s a lot of advice given to young people to follow their heart, regardless of money. I wouldn���t argue with that if you felt called to be a missionary in a remote part of the world. Those that have that type of clarity of purpose early in life are fortunate.
But many of us had no idea in our 20s what we wanted to do for the next 30 years. Does anyone imagine today���s 20-somethings have a better handle on that same question?
My contention: Without a clear-cut mission in life, why not follow the money when you���re young? I think I found almost everything interesting in my 20s. I loved rock music and could have become a low-paid roadie. But I also found finance interesting in my 20s. As a banker, I could do interesting work and help people, while also making money and saving for the future. It worked well for me.
The goal is to move toward financial independence in the first half of life. It���s wonderful to have resources set aside so we have the freedom to reinvent ourselves with a more mature sense of purpose.
My point: Unless you have a distinct calling, why not save as much money as you can early in life by pursuing a fulfilling but decently paid career? That way, as you reach your 50s and beyond, you���ll have some capital built up to fund a new path if you find you���re no longer engaged in your career.
2. Find purpose. Even as we age and lose interest in our career, we may still lack focus about a new purpose. Fortunately, there are some exercises we can do to help us.
George Kinder wrote the book The Seven Stages of Money Maturity and trains financial advisors to help clients figure out what they want to do with their life. He suggests three excellent questions to help discover what���s truly important to each of us. I find them great conversation starters for those struggling to find their life���s purpose. Here are paraphrased versions of the three questions:
If you just won $10 million, how would you change your life?
If you found out you have just five years to live, but you���re in good health, what would you do?
If you���re told today that you have only 24 hours to live, what regrets would you have about your life?
Ask a spouse or close friend to spend a little time talking through these types of questions. As you discover hidden aspirations, you might try some of them out. And if you discover these ideas are something you want to pursue, it may open the pathway to a new direction in life.
3. Give back. Consider what you can pass on to others. There���s a big need for mentors in our society. No one is better suited than those of us with some experience and wisdom to share from our life���s first half.
Encore.org is an organization that has recognized that aging is an opportunity for us to redefine who we are as we age. Mentorship is one of those opportunities. Encore.org can assist by connecting those over age 50 with younger folks. Alternatively, if you���re a grandparent, uncle or aunt, you probably don���t need any help finding a mentee.
Religious traditions capture this same insight. We see older men and women in the church transitioning from their first calling to teaching the community���s younger members. These opportunities continue to exist in churches, as well as in many nonprofits.
For those of us still connected to our first-half profession, running development programs can be one of the most rewarding times of our career. I just got a ���thank you��� note from a single mom who graduated with an accounting degree because of the goals she set in a program I led. It���s one thing to succeed ourselves. But it���s hugely gratifying to play some small part in the success of others.
Joe Kesler is the author of
Smart Money with Purpose
and the founder of a
website
with the same name, which is where a version of this article first appeared. He spent 40 years in community banking, assisting small businesses and consumers.��Joe served as chief executive of banks in Illinois and Montana. He currently lives with his wife in Missoula, Montana, spending his time writing on personal finance, serving on two bank boards and hiking in the Rocky Mountains. Check out Joe's previous articles.The post Life���s Two Halves appeared first on HumbleDollar.
July 25, 2021
See for Yourself
THOSE WHO FOLLOW financial news know that mid-to-late July is the middle of earnings season. While I enjoy learning how companies are performing, I also get agitated by the way the media reports earnings information.
Having spent more than 20 years in corporate finance, I know the rigor involved in preparing earnings reports. Company accountants usually take one-to-two weeks to compile financial results, which then are reviewed by external auditors. In addition, investor relations, legal and other internal teams work to ensure earnings reports fairly portray company results. Depending on the size and complexity of a company, this can add up to thousands of working hours before the reports are released.
Instead of taking time to digest management���s messages and business trends, the media rushes out attention-grabbing soundbites. Consider the analyst who was on CNBC when Apple released its earnings this April. Within minutes, he said, ���If you looked up ���blowout earnings��� in the dictionary, it would be Apple���s March quarter.��� Apple did have a strong quarter, but there���s no way he could have reviewed more than a few headlines before making this definitive statement.
A better way to learn about a company���s performance is to read the company���s full earnings release yourself. These reports are on a company���s website and include financial statements, as well as key trends for the quarter. Most companies also include business metrics, future guidance and detailed sales information.
As a second step, read the company���s periodic filings with the Securities and Exchange Commission. While quarterly and annual filings with the SEC usually aren���t completed until after the earnings releases, these reports will give you a more comprehensive understanding of company performance as well as its financial condition. I get SEC filings from company websites, but you also can find them on the SEC's��website.
For an even deeper understanding, listen to a company���s earnings call, which can be accessed live via the company���s website or through the site���s archive. The first half usually includes information similar to what���s in the earnings release. In the second half, you can gain valuable knowledge from the question-and-answer session with investment analysts, who usually drill into key trends and issues.
While company management may not answer all questions, hearing what analysts are focused on provides insight into potential opportunities and risks. I also pay attention to management���s tone and approach in answering questions. Are they defensive? Are they smooth? Are they too smooth? Whatever the case, this can offer some understanding of how management runs the business.
Having spent more than 20 years in corporate finance, I know the rigor involved in preparing earnings reports. Company accountants usually take one-to-two weeks to compile financial results, which then are reviewed by external auditors. In addition, investor relations, legal and other internal teams work to ensure earnings reports fairly portray company results. Depending on the size and complexity of a company, this can add up to thousands of working hours before the reports are released.
Instead of taking time to digest management���s messages and business trends, the media rushes out attention-grabbing soundbites. Consider the analyst who was on CNBC when Apple released its earnings this April. Within minutes, he said, ���If you looked up ���blowout earnings��� in the dictionary, it would be Apple���s March quarter.��� Apple did have a strong quarter, but there���s no way he could have reviewed more than a few headlines before making this definitive statement.
A better way to learn about a company���s performance is to read the company���s full earnings release yourself. These reports are on a company���s website and include financial statements, as well as key trends for the quarter. Most companies also include business metrics, future guidance and detailed sales information.
As a second step, read the company���s periodic filings with the Securities and Exchange Commission. While quarterly and annual filings with the SEC usually aren���t completed until after the earnings releases, these reports will give you a more comprehensive understanding of company performance as well as its financial condition. I get SEC filings from company websites, but you also can find them on the SEC's��website.
For an even deeper understanding, listen to a company���s earnings call, which can be accessed live via the company���s website or through the site���s archive. The first half usually includes information similar to what���s in the earnings release. In the second half, you can gain valuable knowledge from the question-and-answer session with investment analysts, who usually drill into key trends and issues.
While company management may not answer all questions, hearing what analysts are focused on provides insight into potential opportunities and risks. I also pay attention to management���s tone and approach in answering questions. Are they defensive? Are they smooth? Are they too smooth? Whatever the case, this can offer some understanding of how management runs the business.
The post See for Yourself appeared first on HumbleDollar.
Well Rewarded
AS JULY BEGAN, there was happy news for Chase Freedom Visa cardholders like me: One of the categories for 5% rewards this quarter is grocery stores. We spend a lot on groceries, which means I���ll get a nice cash reward from Chase.
I���m a big believer in credit card cash rewards for two reasons. First, of course, there���s the reward money. The second reason is psychological: Credit card companies are notorious for the outrageous interest and fees they exact from anyone who doesn���t pay off every nickel every month, so I find having them pay me money to be extremely satisfying.
Different cards have different rewards schemes. To maximize your cash back, it can be worthwhile to have more than one credit card���at the cost of a bit more complexity and hassle.
I currently use three cards. The aforementioned Chase Freedom Visa normally pays a meager 1% reward, but also has the rotating quarterly category where certain types of purchases earn 5% on up to $1,500 in quarterly purchases, potentially giving me a $75 quarterly reward. I pay attention to the current category and use the Chase card for those purchases.
I have a Bank of America Cash Rewards Visa which likewise pays 1% but lets you choose an ongoing category that pays 3%. I selected online purchases. I���ve discovered that ordering groceries online and then picking them up curbside���a habit we acquired during the pandemic���qualifies as an online purchase, so I use the Bank of America card for that. Unless, of course, the Chase card���s 5% quarterly category includes groceries.
Finally, I have a Citibank Double Cash Mastercard, which pays 2% on all purchases, all the time. I use that for everything else. It can add up: In 2020, I earned more than $1,100 in cash rewards from the three cards���plus a significant shot of psychological satisfaction.
I���m a big believer in credit card cash rewards for two reasons. First, of course, there���s the reward money. The second reason is psychological: Credit card companies are notorious for the outrageous interest and fees they exact from anyone who doesn���t pay off every nickel every month, so I find having them pay me money to be extremely satisfying.
Different cards have different rewards schemes. To maximize your cash back, it can be worthwhile to have more than one credit card���at the cost of a bit more complexity and hassle.
I currently use three cards. The aforementioned Chase Freedom Visa normally pays a meager 1% reward, but also has the rotating quarterly category where certain types of purchases earn 5% on up to $1,500 in quarterly purchases, potentially giving me a $75 quarterly reward. I pay attention to the current category and use the Chase card for those purchases.
I have a Bank of America Cash Rewards Visa which likewise pays 1% but lets you choose an ongoing category that pays 3%. I selected online purchases. I���ve discovered that ordering groceries online and then picking them up curbside���a habit we acquired during the pandemic���qualifies as an online purchase, so I use the Bank of America card for that. Unless, of course, the Chase card���s 5% quarterly category includes groceries.
Finally, I have a Citibank Double Cash Mastercard, which pays 2% on all purchases, all the time. I use that for everything else. It can add up: In 2020, I earned more than $1,100 in cash rewards from the three cards���plus a significant shot of psychological satisfaction.
The post Well Rewarded appeared first on HumbleDollar.
Not a Law of Nature
THE 4% RULE IS ONE of the best-known ideas in personal finance. But is it really a rule? And does it apply to you?
Let���s start at the beginning. The father of the 4% rule is a financial planner named William Bengen. Back in the early 1990s, he became frustrated with the prevailing rules of thumb for retirement planning. He found them too informal and set out to develop a more rigorous approach. The question he sought to answer: What percentage of a portfolio could a retiree safely withdraw each year? In Bengen���s definition, ���safely��� meant that a retiree would not outlive his or her funds over the course of a 30-year retirement.��
The answer Bengen reached: 4%. Specifically, a retiree could build a reliable plan around a portfolio withdrawal of 4% in the first year of retirement and subsequent annual increases in line with inflation. He arrived at this conclusion after testing hundreds of hypothetical historical portfolios���evaluating different starting points and different withdrawal rates.
Since Bengen���s��research��first appeared in 1994, it has gained in popularity, but it���s also spurred a lot of debate. So how should you think about it?
The first thing to understand about the 4% rule is that Bengen never intended it to be a rule per se. In his paper, he���s clear that 4% is just a recommendation���and only under certain circumstances. In fact, in a recent��interview, Bengen���who���s now retired���noted that the figure he used with his own clients was generally 4.5%. Today, with inflation so low, he believes that 5% makes more sense.
Meanwhile, some take the opposite view. Because of today���s very low interest rates, there���s a camp that believes 4% is far too generous and that 3% or 3.5% is a better number.
Bengen���s 4% figure has taken on a life of its own, and he recognizes the irony in that. His intention was to develop a more rigorous approach that improved upon the old rules of thumb. And yet, over time, his work���which also included an entire��book��on the topic���has itself been oversimplified and reduced to a rule of thumb. That���s why I think it���s worth taking a closer look at the research. As you think about your own retirement plan, and whether 4% would make sense for you, below are six factors to consider:
1. Income.��For many people, income varies throughout retirement. You might, for example, retire at age 65 but defer Social Security until 70. If that���s the case, your portfolio withdrawals might be well north of 4% in those first five years. But that wouldn���t be a problem if you expected them to moderate later on. In other words, your withdrawal rate need not be 4%��or less every��year.
2. Expenses.��For simplicity, Bengen���s research assumes that a retiree���s spending will increase linearly each year, in line with inflation. In reality, though, most people���s expenses vary throughout retirement. Retirees are generally more active, and thus spend more, during the earlier years of retirement. For that reason, it wouldn���t be unreasonable if your withdrawal rates were higher in those early years.
3. Assets.��It���s a morbid topic, but���if you have a reasonable expectation of an inheritance later in life���that might also allow you more latitude on your withdrawal rate early on.
4. Age.��Bengen���s litmus test for a ���safe��� withdrawal rate was one that would allow a portfolio to last at least 30 years. But everyone���s retirement timeframe is different. If you retire very early���say, in your 50s���you might want to plan on a more conservative withdrawal rate. In Bengen���s study, a 3% withdrawal rate would have resulted in sustainable withdrawals for at least 50 years in every scenario. On the other hand, if you choose to work until your late 60s or early 70s, you could afford a higher withdrawal rate.
5. Asset allocation.��The 4% rule of thumb was based on a portfolio of 50% stocks and 50% bonds. But Bengen also spent quite a bit of time looking at the impact of alternative asset allocations, and he warned investors that 4% wouldn���t necessarily work for��all��portfolio mixes.
6. Market valuation.��In 2008, financial planner Michael Kitces��extended Bengen���s work, adding another dimension: market valuation. His finding: If the market is at a relatively high point on the day you retire, a more conservative withdrawal rate would be warranted. Bengen endorses this finding and has built on Kitces���s analysis in more��recent work. In today���s bull market, that���s a key point to keep in mind.
In short, the 4% rule is hardly a rule. Like most things in personal finance, the answer that makes sense for someone else will rarely make sense for you. Bengen himself urges investors not to worship at the altar of 4%. In his words, ���It���s not a law of nature.���
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.
Let���s start at the beginning. The father of the 4% rule is a financial planner named William Bengen. Back in the early 1990s, he became frustrated with the prevailing rules of thumb for retirement planning. He found them too informal and set out to develop a more rigorous approach. The question he sought to answer: What percentage of a portfolio could a retiree safely withdraw each year? In Bengen���s definition, ���safely��� meant that a retiree would not outlive his or her funds over the course of a 30-year retirement.��
The answer Bengen reached: 4%. Specifically, a retiree could build a reliable plan around a portfolio withdrawal of 4% in the first year of retirement and subsequent annual increases in line with inflation. He arrived at this conclusion after testing hundreds of hypothetical historical portfolios���evaluating different starting points and different withdrawal rates.
Since Bengen���s��research��first appeared in 1994, it has gained in popularity, but it���s also spurred a lot of debate. So how should you think about it?
The first thing to understand about the 4% rule is that Bengen never intended it to be a rule per se. In his paper, he���s clear that 4% is just a recommendation���and only under certain circumstances. In fact, in a recent��interview, Bengen���who���s now retired���noted that the figure he used with his own clients was generally 4.5%. Today, with inflation so low, he believes that 5% makes more sense.
Meanwhile, some take the opposite view. Because of today���s very low interest rates, there���s a camp that believes 4% is far too generous and that 3% or 3.5% is a better number.
Bengen���s 4% figure has taken on a life of its own, and he recognizes the irony in that. His intention was to develop a more rigorous approach that improved upon the old rules of thumb. And yet, over time, his work���which also included an entire��book��on the topic���has itself been oversimplified and reduced to a rule of thumb. That���s why I think it���s worth taking a closer look at the research. As you think about your own retirement plan, and whether 4% would make sense for you, below are six factors to consider:
1. Income.��For many people, income varies throughout retirement. You might, for example, retire at age 65 but defer Social Security until 70. If that���s the case, your portfolio withdrawals might be well north of 4% in those first five years. But that wouldn���t be a problem if you expected them to moderate later on. In other words, your withdrawal rate need not be 4%��or less every��year.
2. Expenses.��For simplicity, Bengen���s research assumes that a retiree���s spending will increase linearly each year, in line with inflation. In reality, though, most people���s expenses vary throughout retirement. Retirees are generally more active, and thus spend more, during the earlier years of retirement. For that reason, it wouldn���t be unreasonable if your withdrawal rates were higher in those early years.
3. Assets.��It���s a morbid topic, but���if you have a reasonable expectation of an inheritance later in life���that might also allow you more latitude on your withdrawal rate early on.
4. Age.��Bengen���s litmus test for a ���safe��� withdrawal rate was one that would allow a portfolio to last at least 30 years. But everyone���s retirement timeframe is different. If you retire very early���say, in your 50s���you might want to plan on a more conservative withdrawal rate. In Bengen���s study, a 3% withdrawal rate would have resulted in sustainable withdrawals for at least 50 years in every scenario. On the other hand, if you choose to work until your late 60s or early 70s, you could afford a higher withdrawal rate.
5. Asset allocation.��The 4% rule of thumb was based on a portfolio of 50% stocks and 50% bonds. But Bengen also spent quite a bit of time looking at the impact of alternative asset allocations, and he warned investors that 4% wouldn���t necessarily work for��all��portfolio mixes.
6. Market valuation.��In 2008, financial planner Michael Kitces��extended Bengen���s work, adding another dimension: market valuation. His finding: If the market is at a relatively high point on the day you retire, a more conservative withdrawal rate would be warranted. Bengen endorses this finding and has built on Kitces���s analysis in more��recent work. In today���s bull market, that���s a key point to keep in mind.
In short, the 4% rule is hardly a rule. Like most things in personal finance, the answer that makes sense for someone else will rarely make sense for you. Bengen himself urges investors not to worship at the altar of 4%. In his words, ���It���s not a law of nature.���
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 Not a Law of Nature appeared first on HumbleDollar.
