Jonathan Clements's Blog, page 308

For Your Benefit

ONE OF MY SONS has to choose health insurance for the year ahead—and his employer provided a 95-page pamphlet. Let’s face it: If you need that amount of information to make a choice, something is wrong.

The pamphlet describes three medical options, plus dental options and vision coverage. Two options get you an employer health savings account contribution—or it is a health reimbursement account? There are three levels of deductibles and coinsurance and, of course, premiums. The premiums for the same option vary by four levels of salary, and by whether the employee and spouse smoke. If they participate in wellness activities and tests, premiums are modestly reduced.

My son turned to me for help. I spent almost my entire career working in employee benefits, but it took me several hours to figure it all out. As I was reading the pamphlet, it reminded me of a mutual fund prospectus, with all the caveats and legal boilerplate. And as with a fund prospectus, I suspect few people will read it.

Unfortunately, making decisions about health care coverage is complicated and getting more so. It’s about money—lots of money—but our choices are often driven by emotion.

In my opinion, many people have an unrealistic fear of health care costs, perhaps because they don’t realize that the risk of large expenses is modest. Half the population accounts for just 3% of annual health care spending, equal to $276 per head, and their out-of-pocket costs are about $20 a year. Meanwhile, people age 65 and older account for 36% of all health care spending.



How do you make a sensible choice? The key decision that people must make is balancing premiums against potential out-of-pocket costs. This applies regardless of where you get your insurance. Paying a higher premium doesn’t mean better coverage or a better financial deal. Premiums are a fixed expense—if you opt for coverage with high premiums you know you’ll have high health care costs for the year—while out-of-pocket costs are variable, but they shouldn’t exceed a plan’s out-of-pocket limit. Here are six questions to ask:

How much can you afford to pay in out-of-pocket costs? That’ll be partly driven by the size of your emergency fund—and it’ll perhaps prompt you to add to it.
If you have coverage through your employer, are premiums paid on a pretax basis? If so, you can afford to pay more, with less impact on your net pay.
Is there a health savings account (HSA) available? This is the best way to handle out-of-pocket costs, but it means opting for a high-deductible health plan.
Does your employer contribute toward a health reimbursement account (HRA)? The account helps pay out-of-pocket costs, including services not covered by your insurer.
Can you contribute to a flexible spending account (FSA)? While an HRA is funded by employers, an FSA is usually funded by employees.
Does an employed spouse have other coverage available? Your employer may apply a surcharge if you enroll a spouse who has coverage available through his or her employer. On the other hand, if you coordinate benefits from two employers, you could end up with very low or zero out-of-pocket costs, but are the additional premiums worth it?

The alphabet soup of health benefits is daunting, rules are many and complicated, and I venture to say few workers can or will attempt to figure it all out. In my experience, once people select a health plan, most fail to reevaluate the choice when annual enrollment rolls around—which is a good way to lose money.

Selecting health care coverage is as difficult as selecting 401(k) investments, and perhaps more frightening to most people. And just as with the 401(k), employers are prone to offer too many choices, prompting many workers to make a random selection so they can be done with it. Want to make a smarter choice this year? Keep eight things in mind.

Know your tolerance for out-of-pocket costs.
Balance the additional premiums that may lower out-of-pocket costs with the likely size of those costs. I'm counseling some retirees who were willing to pay $20 more each month in Medigap premiums, or $240 per year, to save $198 by eliminating the Medicare Part B deductible.
A higher premium doesn’t automatically mean a better plan.
Assess your risk by reviewing your past few years of health care spending. In the absence of a chronic condition, what is your actual monetary risk?
Leverage every possible tax-favored tool available—HSA, FSA and so on—just like you would with retirement savings.
Manage your prescription costs by using generic medication, mail order pharmacies and your plan’s designated formulary drugs. Learn about the prescription copays for the various tiers offered in your plan.
Read the literature you receive. There may be changes to your coverage for next year—and there will almost certainly be higher premiums.
Don’t assume the coverage you have now is the best for the year ahead.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include A Seat at the Slots, Want $870,000 and Taking Credit. Follow Dick on Twitter @QuinnsComments.

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October’s Hits

THE ELECTION MAY be hogging the headlines, but it seems folks still have a healthy appetite for thoughtful financial articles. Here are the seven blog posts from last month that garnered the largest number of HumbleDollar readers:

The last major rewrite of the tax code was just three years ago—but the next one may be right around the corner. James McGlynn looks at the potential changes that are in the offing.
Planning to relocate when you retire? Rick Connor’s advice: Check out a state’s property, sales, estate and income taxes—including whether Social Security, pensions and IRAs are taxed.
"We saved our whole life to get where we are," notes Dennis Friedman. "We’re going to make sure we enjoy the rest of our life as best we can. If that means spending down our retirement savings, so be it."
Want to turn yourself into a more tenacious investor? Check out the seven tips from Dennis Friedman.
The Federal Reserve recently revised its "constitution." That might sound arcane—but it has seven key implications for investors, says Adam Grossman.
"For some, the expensive dream home, with all its attendant joys and burdens, may be the right choice," concedes Andrew Forsythe. "Still, I’d suggest thinking carefully about what you’re getting into."
What's in your S&P 500 index fund? You won't find Tesla there—and therein lies an important investment lesson, says Adam Grossman.

What about our weekly newsletters? Last month's most popular were Game Over and Pay It Forward.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Scary Stuff, Irksome Adversaries and Where We Stand.

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Emerging Concerns

AT 82 YEARS OLD, investment manager Jeremy Grantham has seen his fair share of market cycles. And as a U.K. native living in the U.S., he has the interesting perspective of an outsider. In a recent interview, Grantham shared his unvarnished view of the U.S. market. “American capitalism has become fat and happy,” he said. The U.S. stock market is in a bubble that will likely burst within “weeks or months.”

I don’t believe anything should be judged over the span of a single week. Still, the market did drop almost immediately after the interview, making Grantham appear prescient. But let’s back up a little and understand Grantham’s concerns. He cited two.

The first concern: valuations. “We’re in the highest 5% of P/Es [price-to-earnings ratios], and we’re in the lowest 5% of economic conditions.” In other words, we’re in a recession, but the stock market is inexplicably flying high. “There’s never been anything like that in history,” he added.

Grantham’s second concern: “signs of truly crazy behavior.” In his experience, high valuations alone don’t cause bubbles to burst. But when high valuations are combined with increasingly risky investor behavior, the end may be near, Grantham says. That, unfortunately, is what he is seeing now.

He cites investors piling into Tesla shares, causing them to quadruple this year, while also driving up the price of Hertz shares, despite the company being in bankruptcy. Then there’s the recent boom in special purpose acquisition companies (SPACs), otherwise known as “blank check” companies. Grantham equates SPACs to the South Sea Bubble: “Give us your money, and trust me, I’ll do something useful.” His characterization, in my view, is not unreasonable.

For both of these reasons—high valuations and risky behavior—Grantham thinks investors should get out of the U.S. stock market. While he allows for a few exceptions, ideally, Grantham says, investors should “avoid the U.S. entirely."

Instead, he recommends investors shift to emerging markets, including China, Russia and India. They’re “growing far faster” than developed markets like the U.S. and Europe. They’re “cheap, it’s a great opportunity.”

Is this the solution? Should you abandon U.S. stocks in favor of emerging markets? While I don’t disagree with some of Grantham’s concerns about the U.S. market, I do disagree with his prescription—for three reasons:

1. If you need to pay your bills in a particular currency, it’s prudent to have your assets in that same currency. For investors in the U.S., I think you want to have most of your assets in dollars. While it’s often overlooked, currency moves can materially impact the value of an international investment.



Consider a popular iShares index fund (ticker: EWZ) that tracks Brazil’s stock market. According to the iShares website, the fund was down more than 40% through the end of the third quarter. But Brazil’s market isn’t really down 40%. It’s down less than 20%. But because Brazil’s currency has depreciated this year, the results have been far worse for American investors. Of course, this can cut both ways. If a currency appreciates, it can boost returns. But investing is unpredictable enough without worrying about currencies too. That’s why I wouldn't jump into emerging markets stocks with both feet.

2. Valuations on   some domestic stocks are high, but not on all of them. These days, the big technology stocks—Amazon, Apple and so on—get all the attention, and they certainly carry valuations that look stretched. But within the S&P 500, there are still more than 280 stocks that are underwater for the year-to-date. It strikes me as an overreaction to say that you’d have to leave the U.S. entirely to find reasonably priced stocks. In fact, all you’d have to do is add a simple value-stock fund to your portfolio. In Vanguard’s Value ETF (ticker: VTV), for example, more than two-thirds of the holdings are down in 2020. These stocks offer demonstrable value—and they're all domestic.

3. While the U.S. isn’t perfect, many emerging markets countries have policies that should give investors pause. Some have authoritarian regimes. Others exhibit little respect for intellectual property and have shown a willingness to confiscate or nationalize businesses. Corporate governance and accounting rules are more lax.

Should you diversify your stock portfolio outside the U.S.? Absolutely. The data definitely indicate there’s a diversification benefit. I just wouldn’t take it to the extreme that Grantham recommends. I suggest allocating 20% of a portfolio to international stocks. Others prefer more of a market-weighted approach, with something closer to 50% outside the U.S. That’s fine, too. There is no historical data that dictate a specific percentage. The best approach, in my view, is the simplest: Diversify broadly and avoid going to any one extreme.

I should note that Grantham does recommend one other investment category. “If you insist” on investing in the U.S., he recommends venture capital. This is an interesting recommendation. But as one prominent venture capital insider acknowledged, the best venture capital firms are closed to everyday investors. Because of the dispersion in quality among venture capital firms, which I described in September, you really don’t want to be invested in lower-tier funds. The upshot: While venture capital investing can work out well, unfortunately it isn’t a feasible option for most people.

Adam M. Grossman’s previous articles include Look Under the Hood, Follow the Fed and Save and Give First. Adam is the founder of Mayport, a fixed-fee wealth management firm. In his series of free e-books, Adam advocates an evidence-based approach to personal finance. Follow Adam on Twitter @AdamMGrossman.

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Scary Stuff

IT’S HALLOWEEN, but not much frightens me—at least financially. My portfolio is broadly diversified, I have the insurance I need, and I have enough set aside for retirement. The highly improbable could happen, but I’m not going to lose sleep over that.

Still, even for those of us in decent financial shape, I see two key reasons for concern. We have no control over either—which is why they might seem scary—but we can take steps to limit the potential fallout.

Rising rates. I’m not forecasting a sharp increase in interest rates. But if that came to pass, not only would bonds take it on the chin, but also we could see grim short-term stock market returns.

U.S. stocks have spent much of the past three decades at what was once considered nosebleed valuations. The long decline in interest rates is a key reason. As the yields on bonds and cash investments have fallen since the early 1980s, investors have become increasingly willing to buy stocks, and that's driven up price-earnings multiples.

On top of that, U.S. stocks have been nudged higher by two other factors. Corporate tax rates have fallen sharply in recent decades, while company profit margins have been at historically high levels. But these tailwinds could become headwinds: Interest rates might climb, corporate tax rates could rise and profit margins may narrow further.

Still, I think there are two reasons to believe stocks will continue to sport above-average price-earnings multiples. First, as the world has grown more prosperous, investors have more money to invest and an increased appetite for risk, and that’s led them to buy stocks.

Second, today’s big technology companies—as well as other businesses focused on building intellectual capital—almost inevitably look overpriced based on standard market yardsticks, and that’s affecting average valuations for the broad market indexes. What’s the issue? Current accounting standards punish the earnings of companies that spend heavily on research and development, while the intangible assets that often result typically don’t appear on corporate balance sheets.



The upshot: I believe stocks remain an investor’s best bet for earning healthy long-run returns that beat back the twin threats of inflation and taxes, and I don't think share prices will return to average historical valuations. But because of the risk from rising interest rates, it’s crucial to keep money you’ll need from your portfolio over the next five years in bonds or cash investments, and you might opt for even more if you have a low tolerance for risk. At the same time, I’d also favor shorter-term bonds, so any rise in interest rates doesn’t badly damage your bond portfolio’s value.

Needing workers. There’s been a lot of handwringing over the dwindling Social Security trust fund and the yawning federal government budget deficit. This handwringing was widespread even before this year’s massive COVID-19 government stimulus spending. But as I’ve argued before, these are just symptoms of a far bigger problem: The U.S. and other developed nations have increasingly unbalanced economies, with too few workers and too many people dependent on their labor.

This fundamental problem shouldn’t be news to anybody. We’ve known for decades that the retirement of the baby boom generation would create this unbalance, and yet (no surprise here) we’ve done very little about it. From an accounting point of view, we could “fix” this problem by, say, cutting Social Security benefits or raising taxes. But these fixes only truly work to the extent that they push folks to stay in the workforce for longer.

The fact is, in the absence of major technology breakthroughs that raise the productivity of workers or a widespread willingness to spend less, we simply can’t have people continue to leave the workforce at an average age of 62, because we won’t have enough folks producing the goods and services that society demands.

And, no, encouraging workers to save more for retirement is unlikely to solve this problem. What would happen when these folks spend their savings? We’d still have the same fundamental problem—not enough workers producing the goods and services that society wants. The only solution is to get workers to postpone retirement.

If that doesn’t happen, we could potentially see all kinds of economic dysfunction. Demand could outstrip supply, leading to rising inflation. Government budget deficits would balloon further, as tax revenues fall, while the cost of Social Security and Medicare increases. Trade deficits may widen as we try to solve our supply shortage by importing more goods. Eventually, the result would be some mix of inflation, smaller government benefits and higher taxes that, taken together, would force retirees back into the workforce or dissuade them from retiring in the first place.

You might respond that we shouldn’t be much bothered, because a rising average retirement age is almost inevitable. You might also respond that it probably isn’t great to have folks sitting around doing nothing for the last 20 or 25 years of their life, so a rising retirement age would be a healthy development. And you might note that, while others may be forced to work longer, you and I should be okay, as long as we’ve done a decent job of saving for retirement.

Perhaps.

But even if you and I are okay financially, retirement won’t be much fun if our fellow seniors are struggling financially and the economy is in turmoil. What’s the solution? I think it starts with better political leadership. We need policies that encourage folks to stay in the workforce for longer and encourage businesses to create jobs suitable for older workers. That way, we might avoid the economic distress caused by inflation, painful cuts in government benefits and sharp increases in tax rates—and those in their early 60s might not feel so shortchanged when they discover that they need to delay retirement by a few years.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:

“While products and experiences deliver short-term happiness, they don’t have the ability to bring long-term purpose," writes Joe Kesler. "Our relationship with money turns dysfunctional when we demand something it can’t deliver."
David Powell never imagined he'd buy an annuity. But with retirement approaching, he plans to sink 15% of his nest egg into deferred income annuities—for four reasons.
What's in your S&P 500 index fund? You won't find Tesla there—and therein lies an important investment lesson, says Adam Grossman.
Kristine Hayes has been in her current job for 22 years. But what she valued about her job in her 30s isn't what she values today.
Will your nest egg carry you through a long retirement filled with potentially unpleasant financial surprises? Rick Connor suggests building in a margin of safety—by taking three steps.
"How do we resist the impulse to put the greatest weight in our investment decision-making on what happened last?" asks Robin Powell. "The answer, I believe, lies in asset allocation and rebalancing."

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Irksome Adversaries, Where We Stand and Game Over.

The post Scary Stuff appeared first on HumbleDollar.

Yesterday Once More

YOU’RE SITTING in your favorite restaurant, feeling famished. The waiter arrives and reads a long list of mouth-watering specials. Yet the moment he walks away, all you can recall is the last item on the list.

Welcome to the recency effect.

In psychology, the recency effect refers to the human tendency, when asked to remember a long list of things, to have sharper recall of the final items. No doubt you’ve experienced this at a party. When introduced to 10 people, you only recall the name of the last one or two. The recency effect occurs in finance, too, though the consequences can be more serious than forgetting who the man in the blue shirt was.

Quite simply, if you’re making investment decisions based on what happened in the financial markets in the last week or the last day, you risk chasing past winners or perceiving as the greatest risk something that’s already occurred and is already reflected in market prices. We’ve seen that in 2020, with many people turning defensive in March at the peak of the coronavirus crisis, only to see stocks and other riskier assets bounce back sharply in this year’s second quarter.

There’s an evolutionary reason for the recency effect. Thanks to our hunter-gatherer ancestors, our brains are programmed to respond to what we perceive as the most immediate threats. At the same time, we are likely to see the best opportunities as those that proved fruitful in the immediate past.

During particularly traumatic markets or, alternatively, during rampant bull markets, this effect can be magnified. Our short-term memories dominate our decision-making, prompting us to extrapolate recent returns into the future.



The consequence: People often buy stocks at or near the top of the market cycle and sell at or near the bottom. In bull markets, this equates to fear of missing out, while in bear markets the overwhelming imperative is loss aversion.

In response to those who warn of the recency effect, folks will claim that  this time is different . They’ll argue something fundamentally has changed in the markets and a more tactical approach is required.

The problem with this argument: While every crisis is certainly different in one way or another, that doesn’t make it any wiser for investors to base their strategy on what might have worked the last time around. Indeed, this can end up resembling a game of whack-a-mole, where the participant tries—usually in vain—to push rapidly appearing individual moles back into a hole by hitting them over the head with a mallet. As each mole withdraws, another one pops up somewhere else.

How do we resist the impulse to put the greatest weight in our investment decision-making on what happened last? The answer, I believe, lies in asset allocation and rebalancing. By far the biggest influence on our investment performance is how we distribute our money across growth and defensive assets. That allocation should, in turn, be driven by our risk appetite, goals and individual circumstances.

If you decide in a rational moment that your desired allocation is 50% growth (stocks, real estate) and 50% defensive (bonds, cash), then that’s what you should stick with. If share prices drop, your allocation may look more like 45%-55%. If you respond to the market fall by selling stocks and buying bonds, you might end up with 40%-60%.

In other words, the recency effect can drive you away from your target portfolio by encouraging you to change strategy based on information that’s nothing more than a small sample size delivered over a brief period. This is like a pilot who reacts to turbulence by completely changing course.

A better response is to rebalance. If stocks have fallen sharply, you should sell some bonds and buy stocks to get your desired asset allocation back on target. Likewise, if stocks have done well, you should sell some stocks and buy bonds.

The important point: Your investment decisions should be based on your risk appetite, goals and circumstances, not on what happened in the markets over the past quarter and what you think will happen next. So put the mallet away. There will always be a mole popping up somewhere. Just leave the little rascals alone.

Robin Powell is an award-winning journalist. He's a campaigner for positive change in global investing, advocating for better investor education and greater transparency. Robin is the editor of  The Evidence-Based Investor , which is where a version of this article first appeared. Regis Media owns the copyright to the above article, which can't be republished without permission. Robin's previous articles include No Need to Guess, What's the Plan and The Good Advisor. Follow Robin on Twitter @RobinJPowell.

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Still Here

I WAS AGE 31 when I started my job as a department manager at a small college in Portland, Oregon. Back then, it wasn’t unusual for people to mistake me for one of the students.

Now I’m 53 and people assume I’m the mother of one of the students. I’ve been working at the college for more than 22 years, which means I’ve been there longer than most of the current students have been alive.

Spending decades at the same job certainly isn’t the norm. The Bureau of Labor Statistics reports that individuals born between 1957 and 1964 have held, on average, 12.3 jobs between the ages of 18 and 52. I seem to be bucking the trend. My current job is just the third fulltime position I’ve held since graduating college. My hope is it will also be my last job before retiring. In reflecting on what’s kept me on one career path for so long, I realize my motivation has changed over the years.

In my 30s, receiving a paycheck was my primary incentive for working. Buying a home, owning a new car and having nice furniture were at the top of my priority list. I happily spent every penny I earned and paid little attention to the various benefits offered by my employer.

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In my 40s, my life took a jarring shift. I went from being a married homeowner to a divorced renter. I was suddenly less concerned about maintaining my current lifestyle and more anxious about planning for the future. I started contributing a high percentage of my salary to a 403(b) plan. I moved the money in my employer-funded retirement plan from a highly conservative, guaranteed return account to an aggressive growth index fund. I opened a pretax flexible spending account to help cover any out-of-pocket health care expenses. I became acutely aware of the workplace benefits available to me and took advantage of as many as I could.

Now, in my 50s, my priorities have changed again. These days, it’s often the intangible benefits of my job I appreciate the most. I enjoy having a shorter-than-average workweek. I relish the fact I don’t have to work weekends or put in mandatory overtime. I enjoy how comfortable I feel in my job. After 22 years, there’s a certain familiarity with both my coworkers and campus operations that allows me to operate in a mostly stress-free state.

There are, of course, other reasons for me to stay put at this point. In less than two years, I’ll be eligible for valuable early retiree health benefits. And while I still enjoy the paycheck I receive every two weeks, I’ve found that, over time, the money I earn means less to me than having the time to pursue the activities I enjoy.

Kristine Hayes is a departmental manager at a small, liberal arts college. Her previous articles include Easy Street, Decisions, Decisions and Day by Day . Kristine enjoys competitive pistol shooting and hanging out with her husband and their dogs.

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Margin of Safety

MANY FINANCIAL planners say they “stress test” portfolios. That sounds like a good idea, but it isn’t well defined. I decided to do some research to see how I could apply the notion to the investments owned by my wife and me.

I came across a number of useful articles. Investopedia, one of my go-to resources for all things financial, provides this definition: “Stress testing is a computer simulation technique used to test the resilience of institutions and investment portfolios against possible future financial situations.” Forbes, meanwhile, provides a three-step process that I thought was useful.

Among financial planners, two common approaches are historical data analysis and Monte Carlo simulations. The historical approach uses past asset class returns to analyze how a portfolio would have fared historically. The idea: If your portfolio survived the past ups and downs of the financial markets, you’ll probably be okay in future.

The Monte Carlo method is similar, but takes the idea even further. It’s a mathematical method that starts with historical asset class returns for, say, each calendar year and then, over and over again, assumes these annual returns occur in a different order. This results in hundreds or even thousands of different possible scenarios, allowing you to develop a statistical distribution that shows how your portfolio might perform.

Monte Carlo simulations are especially useful for looking at whether folks will have enough money for retirement, given the amount they plan to withdraw each year from their portfolio and the range of potential returns. One big worry: Retirees get hit with atrocious returns early in retirement and those returns, coupled with their own spending, eviscerates their portfolio.

I think both the historical approach and Monte Carlo analysis are useful exercises, and they can help boost confidence in a retirement plan. But both also assume that the future will be at least somewhat like the past. What if that’s a bad assumption? That’s why I’ve added a margin of safety to our retirement plan.

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How do you do that? I’m aware of three key strategies. First, you could assume your living expenses will be higher than is likely. This gives you a buffer if your portfolio doesn’t grow as expected. In fact, some planners assume spending starts high, but declines as their clients age. I’ve observed that in my parents and in-laws. But you probably shouldn’t bank on this happening. Increased medical and long-term-care expenses could kick in as your retirement progresses, so your net spending may not shrink—and it could grow.

Second, you could assume low investment returns. For instance, if your portfolio can support your lifestyle through a long retirement, even if your investment returns simply match inflation, that should make you more confident.

Finally, you might add a margin of safety by assuming you’ll need to spend down your nest egg over a very long life. I run my scenarios through to age 100. The financial planners I know worry a lot about longevity. Many folks, however, seem to be more concerned with dying young and “leaving money on the table.” This attitude often drives them to claim Social Security early. The downside: That means a permanently reduced monthly benefit and hence a weaker retirement safety net.

My engineering training tells me to do a little bit of everything—assume a higher cost of living, low investment returns and a long retirement. After all, you don’t know what or where the anomalies will show up. Can you overdo this? Sure, you could provide so much margin for safety that you live too frugally and deny yourself some well-deserved retirement fun. Still, I wouldn’t cut it too close.

Richard Connor is  a semi-retired aerospace engineer with a keen interest in finance. Rick enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. His previous articles include State of Taxation, Paradise Lost and  Much Appreciated . Follow Rick on Twitter  @RConnor609 .

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Doing Good

DANIEL SUELO is one of the most interesting characters I’ve ever met. At dinner with him and some friends almost a decade ago, I spent the evening trying to understand his view of money—or, to be more accurate, his refusal to believe in money at all.

Suelo was in Montana to talk about a book that had been written about him, The Man Who Quit Money. As the title implies, Suelo—a well-educated and articulate man—made a decision in 2000 to stop using money. At the time I met him, he had lived off the land, foraged for food in dumpsters and managed to survive without using money for a dozen years. When he wasn’t traveling, he solved his need for housing by living in a cave in Utah.

The evening got even more interesting when we went with Suelo to a large, standing room-only event. He was treated as an almost god-like figure by the crowd, who seemed mesmerized by a man who had seemingly found a way to say “no” to the most dominating influence in our culture. I was reminded of the scene in Forrest Gump when a crowd began running with Gump because he appeared to have figured out the secret to life. Suelo seemed to exude the peace and serenity that others craved. The crowd was clearly captivated by the dream of an apparently happy life with no need to strive for money.

Like Suelo, Chuck Feeney has also inspired many to think unconventionally about money. And like Suelo, Feeney is also drawn to spartan living. That, however, is where the similarities end. As profiled in Forbes recently, Feeney amassed billions through Duty Free Shoppers, the successful business he co-founded. Feeney pledged to give away almost his entire $8 billion net worth before he died. He just achieved his goal.

According to Forbes, Feeney gave his money away over the last four decades to charities, universities and foundations. He has nothing left now and he couldn’t be happier. While most of Feeney’s gifts were anonymous, his story is now out. He’s become the inspiration for a movement among billionaires to give away most of their wealth during their lifetime.

I think the intense interest in Suelo and Feeney suggests that something’s awry with our relationship with money. Why is it so fascinating to hear about one guy who quits using money and another who makes $8 billion, only to give it away? When our culture teaches that happiness can be achieved through money, it’s jarring when we see others headed in the opposite direction.

As a bank executive, I worked with a lot of marketing people over the years. One of the first lessons I learned from the marketers: It’s boring and ineffective to sell the features of a product. Instead, you sell the dream. In other words, don’t emphasize the low interest rate on a car loan. Instead, encourage customers to see the bank as helping them become who they were meant to be by financing that Tesla.

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Professional marketers sell things by connecting them to happiness, life satisfaction, fulfillment and peace. The pitch is that we can become self-actualized only if we buy the products that will get us there. The logical conclusion: We need to pursue money to achieve a fulfilling life.

While some products and experiences do deliver short-term happiness, and that’s a good thing, they don’t have the ability to bring long-term purpose. Our relationship with money turns dysfunctional when we demand something of money that it can’t deliver.

One unfortunate casualty: With the rise of consumerism and marketing after the Second World War, charitable giving began to decline. Indeed, Soviet dissident Alexander Solzhenitsyn gave an insightful Harvard commencement speech in 1978 in which he noted that the West was exchanging the pursuit of happiness through virtue for the pursuit of happiness through material goods.

I was on a radio show recently and the interviewer asked, “What’s the purpose of money?” I suggested that its highest and best use is as “a way to bless others.” This definition needs to be more nuanced. For example, one way for entrepreneurs to bless their employees is to reinvest profits in the business, so they’re able to give raises and create new jobs. The definition also shouldn’t exclude caring for ourselves, now and in the future. If we don’t plan for retirement, we may end up being a burden to our children.

I firmly believe helping others with our money can be a spiritual antidote to today’s endless consumerism. But how? If you don’t have $8 billion to give away, here are five ideas:

Tip generously. In Montana, hair salons were forced to shut down for several months due to COVID-19. When I finally visited my barber, I left him a $100 tip. I think he was overwhelmed, but I’m sure I got a lot more joy from the tip than he did. In this pandemic era, countless restaurants have laid off employees. As we have the opportunity to go out again, consider blessing your barber, hairdresser, waiter or waitress with an above-average tip.
Revisit your will. Most of us can’t give away all our money in this life because we need it to live on. When our estate is disbursed, however, we can focus not just on our family, but also on the charities we want to support.
Look at your donation budget. A friend had been giving away 10% of his income, but he decided to up that to 20%. That inspired me to look at my own budget. If you’re currently donating 2% of your income, perhaps a boost to 3% is a way to bless a local charity.
Find an international charity that will stretch your thinking beyond local needs. COVID-19 has been devastating for developing countries. This is a great time to make a difference in another part of the world.
When I searched for what happened to Suelo, I came across a Wikipedia update that said he moved back to his hometown in 2016 and began using money again, because he was taking care of his mother who was in her 90s. I have many friends who are sandwiched between taking care of their aging parents and helping their kids with college. It isn’t a blessing to get to old age and ask our children to care for us, because we failed to plan for long-term care. Even as we seek to help others, we should also look after our future self.

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. Joe’s previous articles were True Wealth and Life as a Loan Shark.

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Money for Later

IF A SALESPERSON had tried to get me to sink my hard-earned money into an investment that’s illiquid or issued by an insurance company, I would have shut down in a New York minute—until now.

My spouse and I recently became owners of a deferred income annuity (DIA), with plans to put perhaps 15% of our savings into these products. Also known as longevity insurance, a DIA involves plunking down money today in return for regular monthly income starting at a future date. What convinced us to buy DIAs?

Income hedge. We want income we can’t outlive. The DIAs will provide us with a safety net if the withdrawals from our 401(k), IRA and taxable savings fall short of what we expect or if our Social Security benefits get cut.
Shrinking yields. Treasury bonds—both the conventional type and those that are indexed to inflation—are mainstay riskless assets in our portfolio. But today, they yield less than inflation. Yields on municipal and higher-quality corporate bonds are also disappointing, especially when you factor in the added risk involved. By contrast, with a DIA, we can collect handsome income, in part because the insurance company will be effectively returning part of our initial investment to us each month.
Longevity risk. Some of us will live much longer than our birth year cohort. It’s impossible to know how life will go, but my spouse and I are keen to stay independent to the end.
Simplicity. Our plan is to collect income from annuities and Social Security, while also taking required minimum distributions from our retirement accounts. Put these three together, and we have a simple plan for turning our savings into retirement income. That simplicity will be useful as we age.

My first concern with buying an annuity was the usual—that our chosen insurer could go belly up or fail to generate the income needed to meet its obligation to us. After the 2008 subprime mortgage fiasco, I’m skeptical of ratings agencies. But I used their ratings and my own review of audited financial statements to choose a top-rated insurer for our first purchase. Annuities are not 100% guaranteed by the FDIC or anybody else. But should an insurer fail, our state’s guaranty association provides a mechanism to recover a portion of our premiums.

My bigger concern was inflation. We bought a joint annuity with a 3% annual cost-of-living adjustment. The DIA will pay guaranteed income every month starting when I’m age 72 and ending when the second of us leaves this vale of tears. The 3% inflation rider reflects my bet that inflation will be similar to the historical average.

Yes, I remember the high inflation of the 1970s. But for a broader perspective, I reread Triumph of the Optimists, which shows annual U.S. inflation averaged 3.2% during the last century. Since then, personal consumption expenditure inflation has averaged less than 3%, according to FRED, the data tool maintained by the Federal Reserve Bank of St. Louis.

What if inflation is much higher in future? With dependable income streams from both Social Security and our DIAs, we can afford to keep a healthy amount of stock market exposure in our investment accounts, which should help if 1940s- or 1970s-style inflation returns.

My last question was about the likely benefits, beyond the peace of mind offered by guaranteed lifetime income, and the costs involved. Ideally, we’ll get back our investment plus a modest rate of return. The two big variables are how long we’ll live and the related issue of opportunity cost—how we would have fared if we’d used the money instead to, say, buy bonds. Bottom line: We have decent odds of breaking even on our DIAs while achieving the main point of our investment, which is hedging longevity risk.

For our DIA purchase, we turned to the same online sellers who offer immediate fixed annuities. The buying process was straightforward, though much slower and more complex than buying a mutual fund. Our purchase took just under two weeks from quote to policy delivery. It would likely have gone faster if we’d used a local insurance agent, rather than buying online. There’s a healthy stack of paperwork involved—less than closing on a house, but far more than a mutual fund prospectus plus a trade confirmation.

If I could change one thing about DIAs, it would be to increase the transparency about the transaction costs involved. We received no cost disclosures similar to those offered by mutual funds. To be sure, all costs are already reflected in the income you’re quoted.

Still, I would like to have known more. For selling an immediate or deferred income annuity, it seems a salesperson might collect a commission of between 1% and 5% of the sum invested. That’s certainly high compared to index fund costs. But it’s a lot less than other annuities, notably variable annuities and equity-indexed annuities, which between them have given annuities such a bad reputation.

David Powell has written software or led engineering teams for 36 years. He enjoys work, vegan fine dining, cycling and travel with his spouse. His previous articles include Beat the Cheats, Get Me a Margarita and Making a Mesh .

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Look Under the Hood

TESLA JUST REPORTED financial results for its most recent quarter. For the fifth time in a row, it announced a profit. This was notable for a few reasons. Among them: Tesla’s increasingly strong performance again raises the question of why it’s been excluded from the S&P 500-stock index.

By way of background, the S&P 500 includes almost all of the 500 most valuable publicly traded companies in the U.S. But Tesla’s stock isn’t included, even though its size today would earn it a spot among the top 10—in the same neighborhood as Johnson & Johnson and Berkshire Hathaway. Still, it isn’t there and it’s worth understanding why.

Standard & Poor’s, the company that created and manages the index, is fairly specific with its criteria for inclusion:

A company must be based in the U.S.
Its market value must be north of around $8 billion.
Its shares must be highly “liquid,” meaning they’re easy to buy and sell on the open market.
The stock’s “float” must be at least 50%, meaning that it isn’t too tightly controlled by big shareholders.
The company must have positive earnings in the most recent quarter, as well as positive earnings, in aggregate, over the past four quarters.

In July, when Tesla last reported earnings, it cleared that final hurdle, delivering its fourth quarterly profit in a row. In the days following the announcement, Tesla enthusiasts fully expected the company to be admitted to the S&P 500. When S&P’s nine-person index committee next met, it did open the door to three smaller companies, including Etsy, a company that’s just 3% of Tesla’s size. But not Tesla itself. It was an odd result. One analyst  it a “headscratcher.”

What happened? The short answer is that nobody knows—or, I should say, nobody outside of S&P knows. And the folks at S&P aren’t saying. When the company issues announcements about index changes, its press releases are terse, with no explanation or commentary. In September, when a reporter asked S&P about Tesla, a spokesperson replied, “We cannot comment on individual companies and potential index changes.”

If you read through the 41-page methodology document available on S&P’s website, though, you’ll understand that Tesla’s exclusion was no mere oversight. In that document, you’ll repeatedly see the phrase, “at the discretion of the Index Committee.” In fact, the word “discretion” appears 35 times in that document. That pretty much explains what’s going on. Like a college admissions committee, S&P does have some guidelines, but ultimately its decisions are made behind closed doors for reasons that only certain employees know.

Is that the end of the story? If S&P’s posture is to be secretive, and it has no intention of changing, why even discuss this? The takeaway for me is that these quirks make it vitally important to understand the indexes underlying your investments. Index fund investing continues to grow in popularity and, overall, I believe that’s a good thing. But that has also led to a profusion of investment choices.

Today, there are at least six major index providers: In addition to S&P, there’s Dow Jones, which has a joint venture with S&P and which created the first market index, the often-cited Dow Jones Industrial Average. Then there’s MSCI, Russell, Nasdaq and CRSP, among others. Some companies, such as Fidelity Investments, have even built their own indexes. It’s estimated that there are more than 5,000 market indexes out there, along with thousands of index funds to choose from. This makes it hard, as an investor, to know what you’re buying.

To add to the confusion, many indexes have similar names but not necessarily the same strategy. Once you move beyond the most basic, broad-based indexes, things can get tricky. Here’s one example: To complement its flagship 500 index of large companies, S&P also offers an index of mid-cap stocks and an index of small-cap stocks. Put them all together, and you might think you’d end up covering the entire U.S. market. But that isn’t the case.

Because of S&P’s discretionary power, some stocks aren’t included in any of those three indexes. One such stock: Tesla, which has been left out in the cold. The index committee won’t let it into the large-cap index. But because of its size, it isn’t eligible for the mid-cap or small-cap index, either. Result: If you had owned those three basic indexes, thinking you had exposure to the entire market, you would have missed out on Tesla’s 398% gain this year. Another one you would have missed: Zoom, with its 654% gain. Zoom also isn’t included in any of those three seemingly comprehensive indexes.

S&P does include both Tesla and Zoom in other indexes, including one called the Extended Market index. But if you hadn’t been aware of that, you would have missed out on those two stocks’ dramatic gains. In fact, funds tracking those mid- and small-cap indexes have suffered losses this year, while the Extended Market index is up more than 10%. It’s differences like this that make it critically important to know what you own.

The bottom line: Before making an investment, always, always look under the hood.

Adam M. Grossman’s previous articles include Follow the Fed, Save and Give First and Don’t Play Politics . Adam is the founder of Mayport , a fixed-fee wealth management firm. In his series of free  e-books , Adam advocates an evidence-based approach to personal finance. Follow Adam on Twitter @AdamMGrossman .

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