Jonathan Clements's Blog, page 326

Battle Over Benefits

ALMOST EVERYBODY collects Social Security at some point in their life. But it seems like that’s the only thing we all have in common.

Why are there such stark differences of opinion regarding Social Security’s purpose and effectiveness? Why are so many Americans willing to believe that one administration or another stole the Social Security trust fund? Why is any effort to modify the program for future retirees immediately denounced as a cut in benefits?

The roots of Social Security go back to the Great Depression. It was a time when there was great suffering, few pensions and where retirement was short—if workers did indeed retire. It was also a time when multigenerational households were more common.

When Social Security was enacted by Congress in 1935, average life expectancy was age 61. Not only did that mean that benefits were paid for just a short period, but also there were many more workers to support each beneficiary. In 1960, a man’s life expectancy at age 65 was 12.8 years. By 2017, it was up to 18.1 years, and yet adjusting the Social Security formula to reflect that increase in longevity is controversial.

Today, Social Security is far more than a retirement benefit. Over six million Americans and their families receive disability benefits. Another six million receive survivor income.

Social Security was controversial in 1935 and perhaps more so today. From the start, the message was clear: The program’s purpose was to relieve poverty. But as of 2020, many Americans still haven’t got that message. Social Security was not intended to be sufficient to live on and yet many endeavor to do so. Among older Americans, 21% of married couples and 45% of single individuals rely on Social Security for 90% or more of their income.

What role should Social Security play in 21st century retirements? There are proposals to increase benefits, though not to the point where most retirements can be funded with Social Security alone. One politician calls for a $1,300-a-year increase. The Social Security 2100 Act would provide a 2% overall boost in benefits.

When you look at the rest of the world, it’s clear the U.S. is lagging in government pensions. There are different measures, but the U.S. is consistently far from the best. Several European countries replace 100% or more of preretirement income, while the U.S. is at about 49%, according to the Organization for Economic Cooperation and Development.

What’s an appropriate income replacement rate? I’ve never seen a recommendation of less than 70% and more often folks call for 80%. What do we mean by replacement rate? I’d argue that what matters is replacing a high percentage of earnings immediately before retirement. After all, those preretirement earnings are what drive a family’s current standard of living.

Needless to say, the level of government generosity gets reflected in tax rates. How much of our senior citizens’ retirement income do we want funded by taxes—and how much by their own savings?

The latest Social Security trustees’ report says that, for the combined trust funds for retirement and disability to remain fully solvent for the next 75 years, we’ll need to boost revenue by an amount equal to increasing in the payroll tax rate by 2.7 percentage points. If that happened, it would bring the payroll tax for Social Security to 15.1%. On top of that, there’s the 2.9% payroll tax for Medicare. Add that in and the total payroll tax would need to be 18%, up from today’s 15.3%, with presumably half coming from employers and half from employees.

Remember, this would merely keep Social Security solvent. If we want higher benefits, we’ll need higher taxes. One benchmark: In the Netherlands, employees contribute 17.9% of income toward the cost of government pensions.

To add to the controversy, some Americans see Social Security as a bad investment. They say, “Allow me to invest the taxes and I’ll do better. By the time I reach retirement, my assets will provide more income than today’s Social Security benefits—and that money will belong to me and my heirs.”

If everything works according to plan, that’s quite possible. But it’s a big “if.” Think of all the possible vicissitudes of life between entering the workforce and age 65, not to mention the risk of a stock market correction just before retirement. I can’t help but think of the discipline it would take to accomplish such savings. Dare I suggest most people don’t have the necessary discipline?

So here’s where we currently stand:

Inadequate retirement planning by far too many Americans.
A Social Security trust fund heading toward depletion, potentially resulting in lower benefits for tens of millions of beneficiaries.
Many Americans don’t understand how the programs works.
Disagreement over whether to change benefits or raise taxes to make the program sustainable—and, if taxes are to go up, who should pay them.
No agreement on how much of retirement income should come from personal savings and how much from the government.

Whatever solution we settle on, I hope it’s based on the facts—without those facts getting twisted for political gain. That sure isn’t happening right now.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include Side Effects, How Not to Move and Change Our Ways. Follow Dick on Twitter @QuinnsComments.

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Working the Rules

IT’S YEARS LIKE THIS that can greatly improve our chances of a comfortable retirement—if we play our cards right. Indeed, thanks to recent rule changes enacted in Washington, there’s a slew of ways to bolster our finances.

What steps should you be taking? Here are seven things to do—and not do—with your retirement accounts right now:

1. Don’t take your RMD. As part of this year’s CARES Act relief package, individuals don’t have to take required minimum distributions (RMDs) from their IRAs or employer-sponsored retirement plans. This includes folks who were waiting until April 1 of this year to take their 2019 RMD. This not only means you don’t have to pay the income taxes normally associated with that distribution, but also the dollars can remain invested and continue growing tax-deferred.

2. Pay it back. If you’ve already taken your RMD for this year, there’s good news. The IRS recently announced that any distribution taken from a qualified plan between Feb. 1 and May 15, 2020, can be returned to the plan. This effectively makes it as if the distribution never happened, so you avoid taxes on the distribution and the money can be put back in the market.

The not-so-good news: This counts as a 60-day rollover, so you can’t do this if you’ve already done an indirect rollover in the last 365 days. (You also can’t return a distribution if it was taken from an inherited retirement account.) In addition, if you have taken multiple distributions during this timeframe, only the last distribution can be repaid.

3. Consider a Roth conversion. Let’s say that, at the market peak, your traditional IRA was worth $100,000, and you were thinking about doing a $25,000 Roth conversion, which would have moved a quarter of your traditional IRA into a Roth IRA. Now, let’s say the account is only worth $50,000 because of the market pullback. That same $25,000 Roth conversion now gets half of your traditional IRA money into your Roth IRA—but the tax bill is no larger.

4. Avoid 401(k) loans. Another recent government relief measure: doubling the amount of money that 401(k) participants can borrow from their plan, so that 100% of the vested balance can be borrowed in 2020, up to a maximum of $100,000.

While this might seem tempting, you only want to exercise this option if it’s your last resort. Whatever you borrow isn’t invested in the market. As stocks recover, you run the risk of missing out on a major portion of the gains, which could deal a major blow to your retirement savings plan.

5. Keep funding your accounts. Instead of taking money out of your 401(k), you should be looking to put more into your plan. If your job situation is stable, now is a great time to consider increasing your contributions to your employer-sponsored plan.

6. Frontload your contributions. Don’t just increase retirement account contributions. Also consider frontloading your contributions, so you increase the amount of time the money spends invested and you put money to work while the stock market’s depressed. One caveat: If your employer provides a match, you’ll want to confirm with your human resources department that altering your contribution schedule won’t prevent you from getting part of the match.

7. Tip the scales. If you don’t anticipate making withdrawals from your retirement assets in the next five years, now is a great time to buy stocks. Most employer-sponsored retirement plans are comprised of mutual funds that invest in various areas of the market, such as U.S. stocks, international stocks, bonds, real estate and so on. Consider rebalancing by selling bonds and using the proceeds to buy more stocks. “Buy low, sell high”? This is pretty much the definition of that.

Peter Mallouk is president and chief investment officer of Creative Planning in Overland Park, Kansas. His previous articles were Don’t Fall for It, Thank Uncle Sam and An Ill Wind. Peter and HumbleDollar’s editor, Jonathan Clements, together host a monthly podcast. Follow Peter on Twitter @PeterMallouk.

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Playing the Odds

ON WALL STREET, there’s a story—apocryphal, I suspect—that’s told about an old trader, a young trader and the 1962 Cuban missile crisis.

Old trader: “They say this could lead to nuclear war.”

Young trader: “So we should buy bonds, right?”

Old trader: “No, we should buy stocks. If we don’t get war, the stock market will rally. And if we get a nuclear war, it won’t matter what we own.”

Today’s pandemic won’t lead to nuclear war (except perhaps in the Oliver Stone movie version). But many folks seem to fear the economic equivalent: that we’ll suffer a downward GDP death spiral that sends us back to the Stone Age.

Needless to say, this would not be good for share prices. But do you imagine you’d be any better off if you had your money in bonds, Krugerrands or certificates of deposit? Let’s face it: If the economy ceases to function, it won’t matter what you own. What if the economy recovers, which everybody—except your crazy uncle—expects will happen eventually? Stocks will go up.

In other words, owning stocks is an asymmetrical bet. As with bonds and cash investments, the most we can lose in the stock market is 100% of our investment. But with stocks, your potential gain is far larger. In fact, it’s infinite. To be sure, we haven’t yet reached infinity—and even the most bullish Wall Street strategists aren’t anticipating that any time soon—but we’ve been doing pretty well. Over the past 100 years, the S&P 500 has climbed 1,573,425%, including reinvested dividends.

True, there have been periods—like today—when you would have been better off avoiding stocks and instead going long cash, hand sanitizer and toilet paper. But these periods typically don’t last more than a year. Indeed, to profit from a stock market downturn, you need to be right not only about the direction of share prices, but also in your timing. History tells us that almost nobody is consistently smart enough or lucky enough to succeed with such bearish bets.

That leaves the rest of us—we poor wretched souls who are neither clairvoyant nor preternaturally lucky—to do the sensible thing, which is to play the lopsided odds offered by the stock market’s asymmetrical bet. Over time, we should allocate as much as we prudently can to stocks, knowing that we’ll suffer occasional rough patches, but also knowing that the stock market’s long-term direction is up.

That doesn’t mean we should stash everything in stocks. If we have money in our portfolio that we’ll need to spend soon, that should be in conservative investments, so our spending plans aren’t derailed by plunging share prices. Similarly, if we’re nervous investors, we might keep more in bonds, so our portfolio’s short-term performance is less erratic.

But even then, a significant portion of our portfolio should always be in stocks. At times like this, the clever cocktail crowd might view such optimism as naïve and unsophisticated. But guess what? In the financial markets, optimism—or, at least, prudent optimism—invariably wins.

How can I be so sure? Forget about economic growth, dividends and corporate profits—the usual reasons given for owning stocks. Instead, simply look around. Consider how people are behaving during this extraordinary period. Here are just five examples of what I see:

I’m a member of the Barnes Foundation, the fabulous museum in Philadelphia. The museum is closed because of COVID-19, but every weekday an employee posts a video discussing one of his or her favorite paintings.
Across the country, protesters are demanding that governors allow local businesses to reopen.
As Peter Mallouk discussed in a recent article, scam artists have rushed to take advantage of the pandemic.
Unable to compete against each other in person, professional basketball players have faced off in long-distance games of HORSE, trying to make baskets from different locations on the court.
Where I live, barbershops aren’t considered an essential service and should be closed. Yet my local barber—a hardworking Russian immigrant—is open, wielding his scissors while wearing a mask.

What do all these folks—some inspiring, some misguided, some larcenous—have in common? They’re trying to make the best of a bad situation. It’s who we are as humans. We’re relentlessly driven to make our lives better. This impulse is especially strong in capitalist societies, because it’s often further incentivized by the prospect of financial gain. It’s the reason I’m fully confident we’ll recover, and probably recover with surprising speed, from the current economic slowdown.

Want to benefit from this relentless drive? That’s why we invest in the stock market.

I don’t know which stocks will fare best in the months and years ahead. Some companies—both privately held and publicly traded—will never recover from today’s economic shock. Indeed, with any one individual stock, we could end up on the wrong side of the asymmetrical bet and lose 100% of our investment. Even entire national stock markets (hint: Japan) can struggle for decades.

But those who bet on the global stock market for the long haul have never lost 100%. For these investors, the asymmetrical bet has always been a winner. After every stock market decline, share prices globally have recouped their bear market losses and then headed higher. Every single time. Want this upward trend to be your friend? The formula is very simple: Buy stocks. Diversify broadly. Wait patiently.

In addition to editing HumbleDollar, Jonathan is the director of financial education for Creative Planning, which is where this article first appeared. Jonathan and Creative’s president, Peter Mallouk, together host a monthly podcast. Follow Jonathan on Twitter @ClementsMoney and on Facebook.

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Retire That Policy?

FOR MOST PEOPLE, life insurance is purchased to protect their income in the event of an unexpected death. If you’re 35 years old, you potentially have 30 or more years of future earnings that your family would lose if you passed away, so having life insurance during these working years makes sense. But what happens once you reach retirement? Before canceling your policy, it’s important to assess your situation, because keeping the coverage might be the better choice.

If you have a term life insurance policy, the key question you should ask at retirement is, “Will anyone suffer financially if I pass away today or in the future?” Even though you’re no longer working fulltime, there could be people still financially dependent on you.

For example, earnings from a part-time job or your Social Security check could be an important source of income for your family. Alternatively, you might be a caregiver for aging parents who would be hard-pressed to pay for care if you weren’t around. In these situations, the rationale for life insurance—protecting those you care about from financial ruin if you pass away—still holds and keeping the policy makes sense. Depending on your situation, you might even consider adding to or extending your coverage.

On the other hand, if you can honestly answer “no” to the above question, then you can likely terminate your term life policy and put the premium dollars toward retirement instead. There’s generally no tax impact when cancelling a term policy and the process is as simple as calling your insurance company.

If you have a cash-value policy—such as whole life, universal life or variable universal life—the analysis is more complicated. Because cash-value policies are more than just life insurance, the first thing to consider is why you purchased the policy in the first place. Was it for the life insurance protection or was it as an investment? Is the policy part of a larger tax or estate planning strategy? Once you understand the role this policy plays in your financial life, you can evaluate whether to keep it—by using a three-step process.

Like the term life analysis, start by considering whether you have any financial dependents and whether your life insurance provides them with needed protection. If it does, keeping some or all the cash-value policy in force likely makes sense.

If the policy isn’t needed to protect your family, the second question to ask is, “Is this policy an important part of my investment, estate or tax planning today?” The operative word here is “today.” Because these policies are often held for decades, your financial situation and today’s tax rules could be very different from when you purchased the policy. If the cash-value policy is no longer important to your financial plans, you’ve passed the second hurdle and might cancel your policy.

But before you do, there’s one more question you should ask: “Is this policy an attractive investment going forward?” Cash-value policies are typically not great investments at the outset, but that can change over time. For example, if you purchased a policy 15 or 20 years ago, it could have guaranteed interest rates that are 3% to 5%, which is very attractive in today’s environment. Also, since the gains on your cash-value policy are tax-free if you hold it until death, the returns on an after-tax basis might be even more compelling.

If you’ve evaluated your cash-value policy using these three questions and came up with “no” for all of them, it’s likely safe to assume you no longer need the policy. Before you cancel it, keep in mind that—because cash-value policies have an investment component—you’ll likely be taxed on any investment gain, so make sure you evaluate the impact on your overall tax bill. Also, if your policy still has surrender charges, consider whether it’s worth keeping it a few more years until the surrender charges decrease or go away altogether.

The IRS has something called a “1035 exchange,” which allows you to transfer the cash value of a life insurance policy into another life insurance policy, an annuity and certain long-term-care policies. With a 1035 exchange, you don’t pay any tax upfront. Instead, your current policy’s cost basis is carried over to the new policy and you pay taxes once cash is taken out in the future.

Depending on your situation, doing a 1035 exchange into, say, an income annuity or long-term-care policy could allow you to better meet your retirement goals while also deferring taxes on your gain. In the case of long-term-care insurance, there’s an additional tax advantage: If you collect benefits, they’re paid out tax-free, so you potentially eliminate all taxes on your gain.

Dennis Ho is a life actuary and chief executive of  Saturday Insurance , a digital insurance advisor that helps people shop for life , disability and long-term-care insurance, as well as income annuities . Prior to co-founding Saturday, Dennis spent 20 years in the insurance industry in a variety of actuarial, finance and business roles. His previous articles include Care to Choose, Don’t Ignore It and Like Old Times . Dennis can be reached via  LinkedIn  or at  dennis@saturdayinsurance.com .

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Anybody’s Guess

IT’S OFTEN DIFFICULT to fathom what causes the stock market to rise or fall. The market doesn’t always reflect how the economy is currently performing—and sometimes the disconnect can seem huge.

This sentiment was captured in a recent MarketWatch headline: “‘The world is more screwed up’ than the stock market is currently reflecting, warns billionaire investor.” The article was reporting on comments made by Oaktree Capital founder Howard Marks, who told CNBC, “We’re only down 15% from the all-time high of Feb. 19… it seems to me the world is more than 15% screwed up.”

Yes, the stock market has indeed performed remarkably well in the face of terrible news. We’ve seen huge unemployment claims in recent weeks. Some 70,000 Americans have lost their lives to the coronavirus. The director of the Centers for Disease Control has warned that a second wave of coronavirus infections later this year may be even more devastating.

Given all that, why isn’t the stock market down even more? Here are five reasons for the disconnect—and what it means for your portfolio:

1. Investors look forward, buying and selling stocks today based on expected future earnings. In other words, share prices are predicated on what the economy will look like in the future, not what it looks like today. Investor are anticipating the economic recovery, rather than focusing on today’s terrible economic numbers.

Takeaway: Don’t buy stocks based on what’s reported in the news today. That news is usually already fully reflected in current share prices.

2. The market likes certainty. As some of the uncertainty about the coronavirus and the economy has been addressed, share prices have climbed. We’ve seen a flattening of the curve for new coronavirus cases in some foreign countries, as well as in parts of the U.S. Projected U.S. fatalities, which had been as high as 240,000, could be more than 100,000 lower, though the range of possible outcomes is wide, according to the University of Washington’s Institute for Health Metrics and Evaluation.

Takeaway: Investors will always confront some degree of uncertainty. The best way for investors to cope with that uncertainty is to own a well-diversified portfolio that includes both stocks and bonds.

3. Individual investors may get emotional, but the stock market doesn’t. According to business columnist Michael Hiltzik, “The point is that the stock market doesn’t care about your feelings. Nor should it. Individual investors are often guided by emotion, but the stock market is structured to neutralize the emotions of individual investors.” You and I might be scared by the high numbers reported for fatalities and unemployment claims, but those numbers only affect the overall market to the extent that they tell us something about future corporate earnings.

Takeaway: Want to keep your emotions in check? Dollar-cost averaging and diversification can help you stay the course in both bull and bear markets.

4. The stock market often sees bad news as good news. For instance, investors saw high unemployment numbers as a sign that the Federal Reserve and Congress would provide more stimulus money for the economy—and that, in turn, would boost future corporate profitability.

Takeaway: It’s best not to buy or sell stocks based on the latest news. Your interpretation of that news might be different from how the overall stock market views it.

5. The market is unpredictable. It’s nearly impossible to forecast the stock market’s short-term performance. For proof, look no further than recent returns. The S&P 500 fell 34% from Feb. 19 through March 23, only to rally 27% since then.

Takeaway: Since we can’t predict what will happen in the short term, we should take a long-term approach to investing. According to Hartford Funds, “Markets are positive a majority of the time. Of the last 91 years of market history, bear markets have comprised only about 20.5 of those years. Put another way, stocks have been on the rise 77% of the time.”

Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor’s degree in history and an MBA. A self-described “humble investor,” he likes reading historical novels and about personal finance. His previous articles include Don’t Count on Me, Don’t Go It Alone and Lost and Found. Follow Dennis on Twitter @DMFrie.

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Side Effects

BEING CONFINED to home—except for trips to the grocery store for “necessities”—is changing me. My frugality has evaporated, my prudent buying habits destroyed, my healthy eating falling by the wayside. What’s happening?

No doubt there is a diagnosis, but in simple terms it’s called stir-crazy—and I’ve got it bad.

I’ve made two trips to the supermarket in the past two weeks. I had a shopping list. But as a result of my affliction, I instead roamed the aisles, on occasion unintentionally violating the one-way arrows taped to the floor. I grabbed what I thought we might need, based on what I’m not sure.

On my first trip, I came home with four containers of Ben and Jerry’s Chunky Monkey ice cream, whipped cream and bananas.  What was I thinking? Little of what was on my shopping list was available anyway. Besides, as I explained to my wife, with the mask on my face, my glasses fogged up, so I wasn’t really sure what I was buying.

On my second trip, trying to fulfill my wife’s craving for chili and finding no ground beef in the meat section, I resorted to buying eight “gourmet” pre-packaged burgers for $20. Now do you see the extent of my problem? I also left the store with two bags of chips that were on sale and two half-gallons of ice cream (which no longer contain half-gallons), as well as packages of chocolate, rice pudding and two bags of pretzels.

And it isn’t just the shopping. In desperation, I rummaged through the freezer and found a fruitcake from 2018. It was still tasty. Must be the rum.

Given my new shopping habits, you won’t be surprised to learn that my eating habits have also been affected by my isolation. I’ve given up my usual bowl of oatmeal for breakfast in exchange for what the Brits call a fry-up.

I was doing some research on the effects of isolation. When I found a science site with an article on the topic, ads for Omaha Steaks kept popping up. I’ve either made quite the impression with Omaha Steaks with my recent orders—or the science site is visited frequently by dysfunctional people like me.

I also find myself checking my Amazon orders as often as I do my Bloomberg watchlist that tracks my investments, which—by the way—have been performing significantly better. I have, however, resisted checking the scale. You know the phrase “this too shall pass”? That’s my new philosophy.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His earlier articles include How Not to Move, Change Our Ways and Home At Last. Follow Dick on Twitter @QuinnsComments.

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Filling the Gap

REACHING AGE 65 is a financial relief for many folks—because they’re finally eligible for Medicare. But then disappointment often sets in.

Why? Medicare might cover just 80% of medical expenses, leaving the patient to handle the other 20%. How will you cover that 20%? The usual solution is to buy a Medigap policy. But there are so many choices that it can be overwhelming.

My goal today: Help you narrow that choice a little—by comparing two Medigap plans, along with Medicare Advantage. The latter is an alternative to the usual combination of Medicare Part A and Part B. Typically, Medicare Advantage plans are similar to an HMO, or health maintenance organization. Roughly a third of seniors are covered by Medicare Advantage, also known as Medicare Part C.

The federal government tries to simplify Medigap offerings by setting guidelines for 10 standardized plans, labeled A through N. The plans are then sold and administered by private companies. Standardized means there’s no difference in coverage between different companies. One insurer’s Plan A covers the identical expenses that any other company’s Plan A will cover. The only difference is the monthly price.

Instead of analyzing all 10 plans, we’ll look at the two most popular: Plan G and Plan N. Most of the other available plans aren’t nearly as popular (or, in the case of Plans F and C, they’re no longer offered to new 65-year-olds). Meanwhile, if you’re covered by Medicare Advantage, insurers aren’t allowed to sell you a Medigap policy.

Plan G has the highest monthly premium, but it also offers the most comprehensive coverage and involves the least hassle. On top of that Plan G premium, you’ll pay the monthly Medicare Part B premium charged by the federal government and you’ll have to meet a low annual Part B deductible, set at $198 in 2020. But leaving aside prescription drug charges and things like dental care, that should be pretty much it when it comes to medical costs. Plan G provides a high but known monthly expense, minimal paperwork and no unexpected annual expenses.

The other popular Medigap plan is Plan N. It has a lower monthly premium than Plan G, but it also comes with negatives. Like Plan G, Plan N doesn’t cover the annual Part B deductible of $198 and you’ll still have your monthly Medicare Part B premium. Instead, the primary difference is that Plan N has $20 to $50 copays and doesn’t cover “excess charges.” Those charges occur because providers can charge 15% more than what Medicare allows. That means Plan N involves more paperwork and potentially greater variation in annual medical expenses.

The third option is a Medicare Advantage plan. Many Advantage plans have no monthly premium, plus you don’t need—and can’t buy—a Medigap plan. Yes, you still have to pay for Medicare Part B, which is typically $144.60 a month in 2020, though it can be far more if you exceed certain income thresholds. Still, Medicare Advantage will have the lowest monthly premiums of the three choices we’re looking at.

What’s the downside of Medicare Advantage? If you have traditional Medicare plus a Medigap policy, you’re free to choose the doctors you want. No referrals are necessary. You’re covered anywhere in the U.S.

By contrast, with Medicare Advantage, your choice of medical providers is limited. You will also face out-of-pocket costs, which could be significant. To compensate, Advantage doesn’t just offer lower or zero premiums. Some routine services may be covered, such as vision, hearing and dental care, which aren’t covered by traditional Medicare. You may also receive prescription drug coverage—something that those on traditional Medicare have to pay extra for.

What’s my recommendation? If you can afford a Medigap plan, start with traditional Medicare plus Medigap. That’ll give you the most flexibility. If the premiums on the Medigap policy later become too expensive, you can always switch to Medicare Advantage.

The reverse, however, won’t necessarily be true. Why not? During the initial age 65 Medicare enrollment period, there’s no medical underwriting when you apply for a Medigap policy. But after that, there is—which means that, if you try to switch from Medicare Advantage to traditional Medicare plus a Medigap policy, you may not qualify for a Medigap policy.

On the other hand, if Medigap premiums are a concern from the start, you should probably opt for Medicare Advantage. What if you started out with traditional Medicare, but didn’t pick a Medigap plan during the initial age 65 enrollment period? If you later try to buy a Medigap policy but don’t qualify for health reasons, you can always opt for Medicare Advantage, where there’s no medical underwriting.

One final piece of advice: When making these choices, there’s no additional cost if you use an independent insurance broker. That broker will be your point of contact, rather than an 800 number. Find a broker who represents multiple companies, including those offering both Medigap and Advantage plans. Ask the broker to compare the G, N and Advantage plans on offer in your zip code.

James McGlynn, CFA, RICP, is chief executive of Next Quarter Century LLC in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of Retirement Planning Tips for Baby Boomers. His previous articles include Four Opportunities, Gives That Gift Back and Danger: Cliff Ahead.

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Regrettable Behavior

INVESTORS, it’s often said, are driven by fear and greed. But I’d add a third item to the list: regret.

The past year and a half have been enough of a rollercoaster to rattle even the most even-keeled investor, creating ample opportunity for regret. Since the fall of 2018, the stock market has dropped 20%, gained 30%, dropped 35% and then gained 30% again. Result? Here are some of the sentiments I’ve been hearing over the past month:

“Why didn’t I sell at the top?”
“Why didn’t I buy at the bottom?”
“Why did I bother with international stocks?”
“Why did I buy high-yield bonds?”
“For the love of God, why didn’t I ever buy a single share of Amazon?”

None of these reactions is surprising—but it’s worth asking if regret like this serves a purpose. There are two schools of thought.

Nietzsche famously said, “Remorse would simply mean adding to the first act of stupidity a second.” In other words, don’t waste any time looking back. But the second school of thought sees a lot of value in looking back—because it allows us to reflect on our decisions and ponder what we might do differently next time.

I’m not sure either approach is 100% helpful amid today’s financial upheaval. It’s just too unusual. Still, there’s been a lot of research on the topic of regret. It’s worth understanding some of the tricks that our mind plays on us at times like this. To help manage the stress and make better decisions going forward, keep these key behavioral finance concepts in mind:

Loss aversion. Probably the most famous concept in behavioral finance is something called prospect theory. The research has found that we hate losses, and disproportionately so. In fact, people dislike losses about twice as much as they enjoy gains of a comparable size.

That’s especially important this year. Since the market peaked in mid-February, the S&P 500 is down about 13%. But as of Friday, the stock market was slightly higher than it was a year earlier. Still, because of our natural loss aversion, it feels much worse than that. It’s very hard to fight this instinct. The most valuable strategy, in my view, is to maintain perspective. When you consult historical charts, it’s much easier to tune out the hyperbolic headlines and focus on where you really stand.

Rumination. Our minds are prone to rumination, considering and reconsidering what we might have done differently. For the most part, this isn’t productive since the past can’t be changed.

That said, if you’re going to ruminate, I’d recommend translating your thoughts about the past into specific plans for the future. If some aspect of your investment portfolio hasn’t behaved as expected this year, spend time researching that particular investment and consider updating your investment strategy.

Many people, for example, are reexamining their bond portfolio. Others are reconsidering the composition of their stock portfolio, because of the weakness of traditionally “defensive” stocks such as utilities and the surprising strength of seemingly risky technology stocks. To the extent that there’s a silver lining in all this, it’s the opportunity to learn and thus be better prepared for the next big decline.

The breakeven effect. While there should be a difference between gambling and stock market investing, they often trigger similar behavior. That brings us to the breakeven effect.

Researchers have found that gamblers who suffer losses in the morning will often make riskier bets in the afternoon in an effort to recoup the money lost. The same thing has been observed among investors. The solution? Fortunately, unlike a gambler, you don’t need to take any action to make back your losses. As this crisis passes, there’s every reason to expect that the market will recover. It may take some time. But if you believe that the economy will eventually heal, there’s no need to turn up the risk level in your portfolio to break even. It will happen on its own.

The brother-in-law effect. There will always be someone in your life who profited—or claims to have profited—from whatever investment looks the smartest on any given day. These days, that might be Zoom Video Communications or Teladoc Health. But just as you should tune out the headlines, you should tune out your brother-in-law or your know-it-all neighbor. Research suggests you’ll be far better off.

Adam M. Grossman’s previous articles include Defending Yourself, As If and Look Around. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.

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We Need to Talk

WE’RE IN THE MIDST of a bull market—in talking. Stuck at home with our families, we’re chatting more with each other, while also frequently touching base with friends and family whom we can’t see in person.

How about devoting some of these conversations to money?

I’m not going to claim that, if we had more frank discussions about money, it would solve all of our financial problems. I’ve seen enough damning data and heard enough horror stories to know that many folks will make huge blunders, no matter how much great financial advice they get. Still, I believe that more talking about money would be a plus, and that it should start with our families. Here are 17 financial conversations we ought to be having:

Get everybody involved: If you just had your first child, talk to the grandparents about making a onetime or monthly contribution to a 529 college savings plan. They’ll never be more receptive to the idea.
Have a discussion with your elementary school kids about how you make financial tradeoffs. Explain that the family spends, say, less on cable channels so there’s more money for vacations.
Tell your middle schoolers what it was like when you first entered the workforce, including the financial struggles you had and what you did to save money. Are you Skyping with the grandchildren? Recounting the story of how you succeeded financially will likely be more powerful than any lecture you could deliver.
Talk to your high school freshmen about how much there’s set aside for college costs—and what that means in terms of picking schools and taking on loans.
Have occasional discussions with your high schoolers about how much you earn, where the money goes, how much you save and where you invest those dollars. Yes, they may be 17, but they aren’t too old for show and tell: Let your teenagers look at your paystub and at the statements from your bank, 401(k), brokerage firm, credit card company and mortgage company.
Ask your spouse—and yourself—whether the two of you have the right spending priorities. Possible topics: What are your three favorite weekly discretionary expenses? Among larger potential expenditures in the years ahead, such as vacations, cars and remodeling projects, what are your priorities?
A little humility helps: At dinner one evening, regale your children with stories of your biggest financial blunders.
Fund a Roth IRA for your teenagers based on their earnings from babysitting, mowing lawns and elsewhere. Yes, you may have to heavily subsidize the funding of the account, but it’s worth it, because it’ll give you the chance to discuss the value of tax-free growth and long-run stock market compounding.
With college costs coming up fast, have another talk with the grandparents about helping with tuition and other expenses.
Get your college-bound kids a credit card—and detail the medieval torture they’ll suffer if they misuse it.
Broach the topic of retirement with your spouse, but spend the time talking about your shared vision for those years. Where will you live and what will you do each day?
Prod your adult children to send you the 401(k) plan information for their first job. Discuss the importance of contributing and which investment options they might choose.
If you sense your adult children may stay put for seven years or more, raise the possibility of homeownership.
Tell your parents what you’re doing to prepare for retirement, and then ask them about their own finances. You might casually toss up questions about how they plan to fund their retirement, when they’ll claim Social Security and how they might handle long-term-care costs.
Ask your parents whether they have any special goals for their estate, such as charities they want to support or sums they’d like to earmark for the grandchildren. From there, you might check on the details of their estate plan, including whether they have powers of attorney so someone else can make financial and medical decisions on their behalf, should they become incapacitated.
If you sense your parents are struggling to manage daily life, ask whether there’s anything you can do to help them maintain their independence. This may open the door to a conversation about downsizing or moving to senior housing. But tread carefully: As we grow older, we sense a loss of control—and we don’t want our adult children badgering us into surrendering even more autonomy.
Remember those difficult conversations you had with your elderly parents? Eventually, you’ll need to have them with your children and other prospective caregivers. How would you like to handle the end of your life? In recent months, I’ve had a surprising number of questions from readers about assisted suicide, should their physical or mental health deteriorate badly. I don’t know much about the topic, but I have a lot of sympathy with the sentiment: None of us wants to spend our final years incapacitated, with little or no quality of life.

Do you know what’s great about these family conversations? They’ll help not just your parents and your children, but also you. As you describe what you’re doing financially, you’ll be compelled to think harder about how you manage your money—and that may prompt you to be a little more rational.

Latest Articles

HERE ARE THE NINE other articles published by HumbleDollar this week:

Want a happier, more fulfilling retirement? Dennis Stearns offers five pointers.
With stock prices down sharply, this is a great time to convert a traditional IRA to a Roth. Richard Connor walks readers through the ins and outs.
“Calculate your family’s total wealth as of the day your spouse dies,” advises Catherine Horiuchi. “Use that as a baseline. Take action to slow and eventually stop any decrease.”
Others may dislike today’s lockdown. Sanjib Saha has enjoyed it—no commuting, a flexible schedule, and more time to exercise, catch up with friends and tend to his portfolio.
“No amount of planning would have made today’s situation easy,” says Adam Grossman. “Still, I see value in thinking about contingency plans, so you know which levers you could pull in case of emergency.”
At this tumultuous time, want a greater sense of financial control? Revisit your living expenses, advises financial planner and author Roger Ma.
In our monthly list of HumbleDollar’s most popular articles, here’s the surprise: Not all the best-read blog posts were about the coronavirus.
Stuck at home and struggling to maintain an optimistic outlook? Jiab Wasserman discusses the eight strategies that have helped her.
“Everybody has an opinion about how and when we should proceed in reopening the economy,” notes Dennis Friedman. “But they fail to realize that the ultimate decision is going to be made by the consumer—you and me.”

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Take It Away, Back to Basics and Growing Conviction.

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The post We Need to Talk appeared first on HumbleDollar.

April’s Hits

WHAT WERE READERS drawn to last month? To my surprise, some of the most popular articles on HumbleDollar weren’t about the coronavirus. Here are April’s seven most widely read articles:

In response to COVID-19, the federal government is offering a slew of financial goodies. What’s in it for you? Peter Mallouk spies nine intriguing opportunities.
The coronavirus is causing financial pain for many Americans. Among those suffering: doctors. John Goodell explains.
If you’re thinking of downsizing, Dick Quinn has some advice: Don’t do what he did.
Catherine Horiuchi thought she and her late husband had done a fine job of planning their estate. But they overlooked one account—and it triggered a costly legal bill.
The popular 4% retirement withdrawal rate is threatened by today’s low bond yields—but it could be saved by buying immediate fixed annuities. Jiab Wasserman explains.
Should you lighten up on stocks? Rick Connor analyzes his finances using five questions posed by Morningstar’s Christine Benz.
It’s been a good week in the stock market for Bill Ehart—not that he’s enjoyed it: “I was desperate to avoid admitting what I’ve actually known for a long time: I’m a reliable contrarian indicator.”

Meanwhile, among newsletters, the most popular were Facts of Life and Take It Away.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Back to Basics, Growing Conviction and Money and Me.

Do you enjoy HumbleDollar? Please support our work with a donation. Want to receive daily email alerts about new articles? Click here.

The post April’s Hits appeared first on HumbleDollar.