Jonathan Clements's Blog, page 328

Buyer Take Care

BEING STUCK at home lends itself to some less-than-healthy habits, including binge watching TV, snacking at all hours and ignoring daily hygiene. One of the most tempting activities: online shopping.

I’m not normally a shopper, but even I can be lured by the thought of that daily delivery. Amazon, FedEx and UPS trucks go up and down my street all day long. With my older grandsons quarantined in California, buying and shipping a small treat to them—and then seeing their expressions of excitement via Zoom—is priceless.

Online shopping also seems like a way to help the economy. Big players like Amazon are hiring. You can also help small businesses that have online presences. I’ve read and heard statements from small and medium-size businesses that online shopping is keeping them alive. It also keeps the large delivery services busy and their workers employed. I was comfortable with this view until a family member forwarded an article that challenged my simplistic view.

The title of the article: “Why You Shouldn’t Order Nonessential Packages During the Coronavirus Pandemic.” The author argued that—with so many of us shifting to online shopping—the number of orders was overwhelming companies like Amazon, making it impossible to follow sanitizing and social distancing guidelines. That, in turn, put their employees at greater risk of contracting the coronavirus. The article recognized that we all need essentials but urged readers to think hard before splurging on nonessentials.

Spending has always been an important topic in personal finance. It’s also been a subject that’s fascinated academics, with research indicating that—after a certain point—money doesn’t buy happiness. But amid today’s pandemic, spending has become a moral question as well, with strong arguments on both sides.

The various articles I’ve read acknowledge that our purchasing decisions involve complex tradeoffs. I hate to think that my choices are putting someone in harm’s way, but I also hate the idea that folks are losing their job or seeing their business fail. I know how much our economy relies on retail shopping.

I’m also a fan of buying local. There are many restaurants, bakeries, wineries and shops that I frequent in normal times, and which I’d like to support right now. They’re owned and staffed by friendly, hard-working people and they help make our community a great place to live. I’ve also been impressed by how quickly some businesses have adapted to the current situation and built a new business model that uses online ordering coupled with safe pickup or delivery.

I don’t claim to be an expert on ethics. But after thinking about this for a few weeks, here are some guidelines I plan to follow—and which might make sense for your family:

Buy from companies that are trying to do the right thing by balancing customer needs with their employee’s health. Many businesses have been publicizing their approach to coping with COVID-19. For example, Amazon has an extensive page on its website detailing the precautions it’s taken.
Consider who you’re supporting with your spending. Is it a business you routinely use and which you’ll continue to use after the pandemic is over?
Think about what you’re buying. Is it a purchase that you could easily justify to friends and family—or are you shopping simply to give your spirits a quick boost?
If purchasing from Amazon, can you use the “no rush” shipping choice? Amazon says this helps it prioritize critical deliveries and execute its logistics in as safe a way as possible.
Think about the local businesses you’re supporting. Have they adapted their practices to provide their products in a safe manner? Have they built an online ordering tool with front door delivery or perhaps curbside no-contact pickup?

Keep in mind that the situation is dynamic, as companies evolve and adapt. The upshot: My spending guidelines may need to change—and yours might, too.

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 Numbers Game, Should You Sell and This Too Shall Pass . Follow Rick on Twitter  @RConnor609 .

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Riding the Bear

THE GREAT RECESSION and accompanying stock market plunge didn’t seem so bad to me. At the time, I was a 20-year-old college student with a little money in a Roth IRA that I’d opened and funded since my high school days. Sure, it was no fun losing half my investment account, but it wasn’t a lot of money—at least compared to today.

In the years since, I’ve fallen squarely into the super-saver category, socking away a large portion of my income. That means the 2020 bear market has stung a bit more than 2007-09, even though—so far—the percentage decline has been far smaller.

Of course, that sting is just the emotional response. We should try to view the recent 35% to 40% pullback as a feature of the stock market, not a bug. The fact is, for stock market investors, drawdowns of 50% or more come with the territory. What doesn’t come with the territory: good investor behavior.

How have you fared through this volatility? Maybe I should rephrase that: What actions have you taken—or not taken? If you’re a long-term stock investor, here are four possible approaches:

1. Sit tight. Have you done nothing through this decline? That means your stock allocation is likely down sharply. A 60% stock-40% bond mix would have been more like 50%-50% at the March 23 bottom—though we don’t yet know whether that was the bottom.

2. Rebalance. Did you have the courage to rebalance your 401(k), moving money from bonds to stocks? Rebalancing is rarely a bad thing. It simply resets your portfolio to the risk profile you identified as appropriate during calmer times.

3. Dollar-cost average. If you automatically contribute to your 401(k), you didn’t have to do anything to keep adding to your stock portfolio. But if you have a taxable brokerage account or an IRA where the onus is on you to hit the buy button, adding to your stock holdings takes more grit.

4. Step up your buying. Did you put extra cash to work as share prices slumped? That’s a great way to take advantage of lower prices and speed up your portfolio’s eventual recovery.

Indeed, it’s amazing how periodically investing into a diversified portfolio helps soften the blow of a bear market. Suppose an investor had $100,000 in a 60% stock-40% bond portfolio. He or she rebalanced annually and invested an additional $1,000 a month. Here’s how our hypothetical investor would have fared in the past three bear markets:

Tech wreck. The early 2000s bear market was, in hindsight, no big deal for our hypothetical investor. The account would have grown to $106,000 by the late 2002 stock market low and, indeed, would have been worth $262,000 in October 2007, when the market next peaked.

Great Financial Crisis. What if our investor started with $100,000 in October 2007? He or she would have been in the red by early 2009, with an account value of $80,000, even after figuring in a year and a half of $1,000 monthly additions. Still, from there, the balance would have ballooned to a whopping $503,000 by the bull market’s end in February 2020.

Coronavirus crash. From the end of January 2020, a $100,000 balanced portfolio would have declined 4% in February and another 8% in March, yielding an account balance of just under $90,000 by the end of March. Where does the portfolio go from there? Only time—and investor behavior—will tell.

Still, we can see the benefits of good investor behavior by looking back at earlier market declines. Consider the four strategies described above—and how they would have played out during the Great Financial Crisis. Again, we’re assuming that an investor starts with $100,000 in a balanced portfolio. All four approaches ultimately work out fine for the long-term investor, but as you progress through the four stages, the portfolio recovers ever more quickly.

1. Do nothing. At the worst point, a 60% stock-40% bond mix would have been down 29%. Still, the portfolio would have recovered its losses by December 2010, assuming an investor took no action.

2. Rebalance every six months. The portfolio was back to $100,000 by October 2010. At its low, it was off 31.5%. Why is this short-term loss larger than in the “do nothing” scenario? There’s increased risk when you rebalance during a bear market, because you’re adding to your stock exposure as share prices drop.

3. Invest $1,000 a month, while also rebalancing. The portfolio gets back to even—meaning its value is equal to the $100,000 initial investment, plus all subsequent monthly contributions—as of April 2010. The maximum drawdown was 30%.

4. Invest $2,500 a month, while also rebalancing. Our investor’s portfolio is worth $170,000 as of February 2010, equal to the $100,000 initially invested plus the $70,000 in subsequent contributions. The maximum drawdown was 28%.

I know, I know, that was a lot of numbers. But here’s the point: The key is to keep your cool and stick to your strategy—and a smart strategy is to rebalance occasionally and to continue saving regularly. Find that a struggle? If you don’t want to go it alone, look for a fee-only fiduciary financial advisor to guide you.

Mike Zaccardi is a portfolio manager at an energy trading firm and a finance instructor at the University of North Florida. He also works as a consultant to financial advisors on an hourly basis, helping with portfolio analysis and financial planning. Mike is a Chartered Financial Analyst and Chartered Market Technician, and has passed the coursework for the Certified Financial Planner program. His previous articles include Stepping Up, Where’s My Refund and Scratching That Itch. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn and email him at MikeCZaccardi@gmail.com.

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Thank Uncle Sam

TO STAVE OFF the financial impact of COVID-19, the government has unleashed an unprecedented array of stimulus programs, tax law changes and other incentives to encourage economic activity. Result: There’s a slew of financial planning opportunities that can benefit almost all of us. Here are nine of them:

1. Refinance your debts. With the Federal Reserve’s recent rate cut, interest rates are now at their lowest level since 2008. These lower rates will take time to filter through the lending system, but they’ll eventually manifest themselves as lower rates on mortgages, car loans and even credit cards.

Now is a great time to consider refinancing existing loans, especially your mortgage. Indeed, if you have enough equity in your home, you might consolidate some of your higher-cost debt with a cash-out refinancing, using proceeds from your mortgage to pay off, say, your credit card balances.

2. Fund retirement accounts early. If you’re still working, consider accelerating contributions to your IRA, as well as to your 401(k) or similar employer-sponsored retirement plan. By completing your annual contribution earlier in the year, you’ll enjoy a longer period of tax-favored growth, plus your contributions will buy stocks at prices that are well off their previous highs. One caveat: If your 401(k) investments earn an employer match, confirm with your human resources department that changing the timing of your contributions won’t impact the match.

3. Check on your stimulus. The government is in the process of rolling out direct payments to taxpayers, with the amount received varying by income, marital status and number of dependents. Unsure if you’ll receive a payment? This link can show you how much your payment might be. Want to get your payment faster with direct deposit or, alternatively, check on your payment’s status? Go here.

4. Save on student loan interest. For federal student loans currently in repayment, the government has automatically suspended payments through Sept. 30. In addition, the interest rate on those loans has been temporarily set to 0%.

Don’t need the break from payments? If you continue to pay on loans during this period, 100% will go toward the principal balance. If you were on an automatic payment plan, and you wish to keep making payments, contact your loan servicer to turn the payments back on.

5. Watch out for school refunds and 529s. With educational institutions cancelling campus classes for the remainder of the school year, many are starting to refund the cost of room and board that are no longer being used. If these expenses were paid for out of a 529 plan, the refund needs to be redeposited into the plan within 60 days. Otherwise, it could be subject to income taxes and a 10% penalty.

It’s a good idea to do this the old-fashioned way: Send a paper check to the plan, along with a letter explaining the refund and the statement from the school showing the reason. This way, you have a paper trail if questions are ever raised.

6. File taxes later. The IRS has postponed the tax-filing deadline to July 15. This also extends the opportunity to make 2019 IRA and health savings account contributions until that date. In addition, estimated quarterly payments for both the first and second quarter of 2020 have been delayed until July 15.

What does all this mean? You have more time to reduce your 2019 taxable income with an IRA contribution. You can, for now, also hang onto the cash that would otherwise go to tax payments. Penalties and interest for late payments begin accruing on July 16, so make sure you’re ready to make your tax payment before then.

7. Tap retirement accounts early. If you or your spouse have been financially impacted by COVID-19, the IRS has suspended penalties on early withdrawals from IRAs and employer-sponsored retirement plans for amounts up to $100,000. The distribution is still subject to income tax, but the IRS is allowing taxpayers to spread out the taxable income over the next three tax years, 2020 through 2022.

If you take this distribution, you have the choice to recognize all the income in 2020, which could be a smart play if you’ll be in a low tax bracket this year, and you expect to move up to a higher bracket in 2021 and 2022. Even better, the IRS will let you repay the distribution over the next three years. If you do so, not only do you get to resume the tax-favored growth, but also you can reclaim any taxes paid on the distribution by filing an amended tax return.

8. Swap to a Roth. Now may be the ideal time for a Roth conversion. Let’s say you have a traditional IRA that was worth $200,000 but has since dropped to $100,000. If you convert $50,000 of the account to a Roth IRA, that $50,000 will be included in your 2020 taxable income.

In return for that tax hit, you’ll enjoy some key benefits. You’ve moved half of your traditional IRA to a Roth IRA, where future withdrawals will be tax-free, and you’ve done so when stock prices are depressed. You’ve also dramatically reduced the amount of future required minimums distributions from your traditional IRA.

9. Skip that distribution. The IRS has suspended required minimum distributions, or RMDs, for 2020. Want even more good news? If you’ve already taken your 2020 RMD, you can redeposit the funds within 60 days of the distribution and avoid the taxes. What if you’re outside the 60-day window, or if the RMD was taken from an inherited IRA or inherited 401(k)? The funds, alas, can’t be redeposited.

Peter Mallouk is president and chief investment officer of Creative Planning in Overland Park, Kansas. His previous article was An Ill Wind. Peter and HumbleDollar’s editor, Jonathan Clements, together host a monthly podcast. Follow Peter on Twitter @PeterMallouk.

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As If

I HAVE A BIG problem with a small word. But before I get to that, I’ll start with a little bit of history.

In his book The Success Equation, Michael Mauboussin tells this story: Back in the 1970s, a Spanish man won the country’s biggest national lottery, called El Gordo—the Big One. Awarded annually at Christmastime, it’s the rough equivalent of our Powerball. In this particular year, when the winner was interviewed, he explained how he selected the winning number. He had been looking for a ticket, he said, with the digits four and eight because of dreams he had been having. Specifically, he said that he had “dreamed of the number seven for seven straight nights. And seven times seven is 48.”

While this is funny, the reality is that the financial media—especially at times like this—often follow similar logic. For example:

“The Dow Rises as the Market Waits for an Interest Rate Cut”
“S&P Drops as Tech Wreck Weighs”
“Stock Market Rises as Fed Calms Inflation Worries”

On the surface, there may not appear to be anything wrong with these headlines. But there’s that little word that I have a problem with—the word “as.” I think these statements are unhelpful because they imply a cause-and-effect link where one may not exist: The market rose because of this or fell because of that.

Articles like this appear every day, but the reality is that “the market” doesn’t have a mind of its own. It’s merely a collection of individuals, and individuals don’t all think and act uniformly. Every day, innumerable variables combine to influence investment markets. To be sure, there are overriding themes that drive a good part of stocks’ ups and downs on any given day. But headlines like this suggest that these relationships are simple and predictable when often they aren’t.

The author Nassim Nicholas Taleb compares the stock market to a billiards table: When you hit the first ball, you can be pretty sure where it’s going to go. And a skilled player might be able to control what happens when that first ball hits the next one. But beyond that, it’s anyone’s guess. Things are just too random.

The stock market is the same way. There are some basic rules of thumb, but they’re hardly ironclad or predictable. For example, when a company reports quarterly earnings that exceed expectations, that usually drives the company’s stock higher. But there are lots of exceptions. Sometimes, Wall Street analysts deem the results “low quality,” even when they are above expectations, and then the stock might go lower, not higher.

Another rule of thumb: When the Federal Reserve cuts interest rates, that drives stocks higher. But consider what happened a month ago. On March 15, the Fed held an emergency Sunday meeting and announced a rate cut. The market’s reaction? Instead of rising, the Dow dropped 13% when the market opened the next day.

These sorts of things happen every day, so it’s clear that investment markets don’t follow simplistic rules. And yet we continue to see headlines that imply that they do.

Why is this the case? Mauboussin, in The Success Equation, quotes psychologist Steven Pinker. For evolutionary reasons, he says, our minds have learned that to survive we must always be looking to make sense of the world. As a result, Mauboussin writes, “We string together events into a satisfying narrative, including a clear sense of cause and effect.”

Such explanations aren’t just satisfying, they’re comforting. The world feels a lot safer when we perceive there to be logic and order, when things appear to happen for a reason. It’s much more unsettling to believe that our lives are governed simply by luck and randomness.

But sometimes, Pinker says, this part of our brain goes into overdrive, telling stories and drawing conclusions even when they’re completely made up. At times like this, he says, the mind becomes a “baloney generator.”

Why does it matter if we tell ourselves some “baloney” stories to make ourselves feel better? What harm could that cause our finances? It’s a problem, I believe, because we rely on past experience to help guide our future actions. When the news media, or others we view as experts, tell us stories that connect cause and effect in ways that are just made up, we draw conclusions that shouldn’t be drawn and learn “information” that shouldn’t be learned.

Where does this leave us? As is usually the case, Warren Buffett offers useful guidance. “Games are won by players who focus on the playing field,” he says, “not by those whose eyes are glued to the scoreboard.”

As we navigate this uncertain time, it’s natural to feel a lack of control, and to want to follow every piece of news and every tick of the stock market. But I think it may be helpful to take a step back. I don’t know whether it will be this year or next year, but I think it’s safe to say that eventually we’ll develop a treatment or a vaccine, or both, and then our economy will once again move forward.

As you make investment decisions, I would encourage you to keep that in mind. Keep your focus on the medium and long term, and plan accordingly. Don’t worry so much about the day-to-day movement of stock prices—and how commentators explain them. Will there be bumps in the road? Of course. Is the timeline uncertain? No doubt. But eventually the world will get through this.

Adam M. Grossman’s previous articles include Look Around, Under Pressure and Unpleasant Surprise . 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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Back to Basics

GOT QUESTIONS? We’ve got answers. This week, a new chapter was added to HumbleDollar’s online money guide. The chapter’s goal: to tackle basic financial questions that often crop up, especially among those new to the world of investing and personal finance.

This might seem like an iffy moment to make financial changes. I’d argue just the opposite is true. With the stock market down sharply, this is a great time to get started as an investor. Meanwhile, with the coronavirus spreading rapidly and the economy in turmoil, it behooves all of us to make sure we have the right insurance, enough emergency money and a buttoned-up estate plan.

The good news: None of this is that complicated. Want to get your finances headed in the right direction? Check out the answers to the nine questions below.

What should be my top financial priorities?
How much should I save?
How can I get started as an investor?
How much cash should I hold?
What mix of stocks and bonds should I own?
Should I buy into stocks slowly or all at once?
What insurance policies do I need?
How much money do I need for retirement?
What estate planning steps should I take?

Latest Articles

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

“I advise against stock-picking,” writes Adam Grossman. “At its lowest point, the S&P 500 was down 34%. But that was the average. Across companies, there was—and continues to be—wide disparity.”
If you’re thinking of downsizing, Dick Quinn has some advice: Don’t do what he did.
The coronavirus is causing financial pain for many Americans. Among those suffering: doctors. John Goodell explains.
“I still recall the pinch in my long-ago budget,” reminisces Catherine Horiuchi. “But as I say goodbye to steady paid employment, I’m grateful for the early savings habit I adopted.”
Buying long-term-care insurance? Dennis Ho explains the four key differences between traditional and hybrid policies—and offers three tips to help you choose the right coverage.
“We should have conversations with our loved ones about the things they may cherish in our absence,” writes Dennis Friedman. “My parents would never believe the garden clippers would mean so much to me.”
Today’s economic slowdown has highlighted the typical American family’s perilous financial state. Will the coronavirus be a wake-up call? Dick Quinn has his doubts.
“Remember, spending today is borrowing from our future self,” notes Jim Wasserman. “The crucial question: Will our future self regret the spending choices we make today?”

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Growing Conviction, Facts of Life, Money and Me and 27 Things to Do Now.

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How Not to Move

THE SAGA is finally over—18 months and $50,000 later. That’s what my clever moving strategy cost, including taxes, interest, insurance, utilities and some maintenance on the house I hadn’t lived in for more than a year. My strategy was intended to lessen stress, but instead it did just the opposite.

This all started because our 1929 house became too much to cope with, the stairs became too much for my wife—and I resisted moving for too long. My son the realtor kept encouraging us to move. We finally agreed to look at a condo in a 55-plus community that’s literally 100 feet from our current town line. The new condo meant we could keep all of our friends and community connections built over many decades.

I learned a hard lesson about selling a house: Price matters—a lot. When we decided to move, the collective wisdom of neighbors and realtors was that a good price was about $600,000. Based on that guesstimate, we bought our condo for $580,000. More cash would soon be in our future, or so we thought.

Instead, to sell our house, we had to accept $505,000, plus pay $2,000 to remove a previously abandoned and inspected oil tank, and another $3,500 to repair the driveway above where the tank used to be. My advice: If you have an oil tank buried in your yard, get rid of it now.

The good news is, Zillow tells me our new condo is now worth $621,000. Another unit the same size in my building just sold for $665,000. I’ll never see the money, but my kids will be happy someday.

Based on my unrealistic assumptions about how long it would take us to clean out the house and get it sold, I took out a short-term mortgage to buy the $580,000 condo. I put down the minimum and borrowed the rest, resulting in a steep 5.375% interest rate. In the end, after closing costs, I cleared $475,000 on the sale of the old house. The upshot: I must now come up with cash to pay off the remaining mortgage. That means either I sell investments or I lie awake each night stressing over the mortgage payment for a few more months.

Thinking of downsizing? Here are seven tips:

Start by defining your goals and priorities. Are you seeking to save money, reduce the hassles that come with a house, accommodate physical limits, move to a more desirable location or increase your social interaction with your age group?
Decide where and what type of residence you want, taking into account current and likely future physical limitations. Age-based community, freestanding house, townhouse, condo, rental property or continuing care community?
Start cleaning out your accumulated stuff sooner rather than later. Trust me, your kids don’t want your stuff—not even the good china or silver.
Figure out in advance the transition from old home to new. Can you buy before you sell? If not, once you have an offer for your current place, are you prepared to clean out the old house in a short period of time, while looking for a new place to live?
The younger you are, the easier it’ll be. I’m 76 and my wife is 80. That’s at least 15 years too late—speaking now from experience.
Don’t jump unless you and your spouse are in total agreement on every aspect of the move. Okay, that’s unrealistic when it comes to cleaning out long-forgotten treasures. Give in now—and wait until it’s apparent there’s no place for those treasures in the new home.
Are you counting on saving money or at least breaking even by downsizing? Run the numbers. My property taxes dropped by $2,000, and my insurance and utility bills were halved. I have no cost for snow removal, landscaping or home maintenance. But my homeowner’s association fee is $800 per month.

Now comes the really hard part: letting go. Even though we’ve lived in our new condo since September 2018, reality set in as we turned over the key to the old homestead. Our children came for one last look. My wife took pictures of every room and wanted to meet the buyers, so she could feel the house would be in good hands. I’m trying to be stoic, but it’s not working: 44 years in one place raising a family leaves a lot of memories. Old age makes those memories far more valuable than all the accumulated stuff.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His earlier articles include Change Our Ways, Home At Last and Know Your Demons. Follow Dick on Twitter @QuinnsComments.

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Care to Choose?

DESPITE THE NEGATIVE press, long-term-care insurance can be a smart buy. In fact, policies can be affordable for those as old as age 79. But as with any financial product, it’s important to understand what you’re buying—and make sure it fits with your goals.

In my last article, I discussed how much money you might earmark for long-term-care (LTC) costs. Need insurance to hit your goal? Today, the two main products are “traditional policies” and “hybrid life and long-term-care policies.”

Both types of policy offer similar LTC benefits. There are six core activities of daily living, or ADLs: bathing, dressing, using the toilet, transferring (getting around), continence (controlling your bladder) and eating. If you need help with two out of six ADLs, you should qualify to collect on your policy’s LTC benefits, no matter what type of coverage you have. There’s usually a 90-day waiting period before you can start collecting, though some products have no waiting period.

When you purchase an LTC insurance policy, your coverage is defined in terms of a monthly benefit amount and a total benefit amount. For example, you might purchase a policy with a $3,000 monthly benefit and a total benefit of $108,000. This means that you can draw up to $3,000 per month until a total of $108,000 is paid out. Result: The policy would cover you for at least three years.

What if you draw less than $3,000 in any month? The money stays in the pool for you to use later, so you could theoretically stretch out the $108,000 pool over more than three years. Most policies today give you the flexibility to use the funds for a range of services from home health aides to assisted living facilities to nursing homes, so you can customize care to your specific needs.

If traditional and hybrid policies offer these same core benefits, how do they differ? There are four key differences.

Difference No. 1: potential return of your premiums. Most traditional policies don’t return premiums. If you die without needing any or much long-term care, your policy simply lapses and your heirs get nothing.

By contrast, hybrids include a death benefit that returns your premiums, minus any LTC benefits you’ve collected. The upshot: With a hybrid policy, you’re always guaranteed to get at least your premiums back through LTC benefits, a death benefit or some combination of the two. Keep in mind that the death benefit is only a return of your premiums and isn’t meant to provide true life insurance coverage. If life insurance is your primary goal, a hybrid policy is not the right product and, instead, you should consider a standard term or cash-value life insurance policy.

Difference No. 2: premium guarantees. Traditional policies typically don’t have guaranteed premiums, which means insurers can potentially raise prices. We’ve all read stories about policyholders who bought coverage decades ago and are now experiencing large premium increases that force them to reduce or cancel their coverage. Because insurers now have much better data and are more conservative, we’re less likely to see such huge increases on policies sold today. Still, the fact that traditional policies include the right to increase rates is a risk that buyers should keep in mind. Meanwhile, hybrid policies have guaranteed premiums and benefits, so future price increases aren’t a concern.

Difference No. 3: premium payment period. While some traditional policies allow for payments over a limited period, such as 10 years, most involve lifetime payments, whereas hybrid policies are typically paid up in 10 years or less. Concerned about the risk of outliving your savings? Traditional policies with lifetime payments add to that longevity risk, since the longer you live, the more you pay.

Difference No. 4: premiums. Because of the shorter payment period for hybrid policies, coupled with guaranteed rates and the potential return of your premiums, the “headline” monthly premium is often much higher on a hybrid policy than it is with a traditional policy.

Given these differences, it isn’t always obvious which product is the best fit. How do you choose? When I talk to buyers, I offer three tips.

First, when starting out, be open to both types. The relative value of traditional and hybrid policies differs depending on your age, gender and coverage amounts, so it pays to consider both. For example, while you might hate the idea of prices potentially increasing on a traditional product, the initial premium might be so low relative to a hybrid that you’re okay taking that risk. In addition, depending on where you live, there may be tax benefits or a “partnership program” that makes the traditional product even more attractive. On the other hand, I’ve seen situations where the lifetime cost of a traditional policy is very close to the cost of a hybrid, which makes the hybrid policy an easy choice if you can afford the higher early premiums.

Second, look beyond the headline premium numbers, because it won’t tell you which is a better value. Ideally, you want to project total costs and benefits for both types of policy under a range of scenarios. For example, which product is better if you need long-term care in the next 10 years? What if you don’t need care until much later? What if you die without ever needing care?

Find an insurance agent who can help you run this type of analysis, so you can make an informed decision based on multiple scenarios. If the agent is only making recommendations based on headline premiums, you aren’t seeing the full picture. If you’d rather not use an agent, I’ve created a simple Excel spreadsheet that helps me do this comparison. I’m happy to share the spreadsheet with anyone who emails me.

Third, don’t sweat the details. Once you’ve decided how much coverage you want and whether you want to go traditional or hybrid, you’re 90% of the way there. The final step is selecting which insurer to buy from. There will be minor differences in the policies, but don’t let those sway you. If you stick with the largest insurers in the business, their core products are similar. My advice: Just pick the policy that gives you the biggest potential benefit for your premium dollars.

For those interested in learning more about long-term-care insurance and getting some sample pricing, check out the free tool on the website that I help run.

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 Don’t Ignore It, Value for Your Cash and  Waiting Game . Dennis can be reached via  LinkedIn  or at  dennis@saturdayinsurance.com .

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Income Isn’t Wealth

MY WIFE AND I recently read The Ant and the Grasshopper, from Aesop’s Fables, to our youngest daughter. If you recall, the grasshopper mocks the ant for spending all his free time amassing food. But when winter comes, the starving grasshopper begs for assistance—and the ant refuses.

Lately, I’ve been struck by the irony of this parable. As we celebrate the role of physicians in keeping us all safe from a virus, that same virus is slowly starving physicians of their salaries. How am I acutely aware of this bizarre conundrum? I’m married to a family physician.

Before you break out the world’s tiniest violin, allow me to paint a picture of what I and others are witnessing across the nation. The economics are startling, even if the personal finance lessons are a well-worn, cautionary tale.

Since this virus’s arrival on our shores, more or less all of us are now under some kind of quarantine, except essential workers. As hospitals have halted their elective procedures to free up bed space and medical equipment, their revenue has taken a massive hit. In addition, many outpatient clinics have closed to prevent the spread of the coronavirus. Our once-booming economy has now ground to a halt—even for the medical field.

Those clinics that remain open have seen a dramatic decline in patients, who are presumably afraid they’ll get the virus by visiting the doctor. I went to my doctor’s office recently. It was a ghost town. It’s usually packed with people, but there were no other patients the entire time I was there. Many offices, including my wife’s, have gone to virtual medicine via video platforms, which has helped alleviate—but not eliminate—the financial burden.

Keep in mind that these same doctors are on standby if or when hospitals become overwhelmed. They will begin seeing patients to relieve the strain on hospital staff. In fact, that exact scenario is playing out in New York right now. Other hospital systems around the country have told their physicians to be prepared to do the same.

As the spouse of a physician, I have a lot of friends and acquaintances in the medical field. I’m seeing firsthand how little emergency savings many physicians have. Some doctors are now turning to locum opportunities, which is a type of moonlighting for physicians, to cover their earnings shortfall.

As Thomas Stanley observed in The Millionaire Next Door, doctors have notoriously high spending habits, including large houses with equally formidable mortgages, fancy cars with liens and kids in expensive private schools. They also typically carry enormous debt incurred from all their schooling and low-paying residency years. Yes, like the rest of us, doctors may have investment accounts. But those savings are needed at precisely the wrong time—when the stock market, and hence their investments, are down significantly.

I believe many physicians are now learning the difference between wealth and income. When you’re heavily in debt and have high living costs, a high income can set you up for poverty, not wealth. Ordinarily, medicine is about as recession-proof an industry as exists. But a microscopic virus has shredded physicians’ sense of financial safety, while also putting their physical safety at risk.

A cruel, added twist of irony: While stimulus checks will help out many Americans, most doctors won’t qualify, because they previously enjoyed salaries in excess of the level required to receive assistance.

The oft-quoted “this too shall pass” applies not just to today’s health and economic crisis generally, but also to the unfortunate position that doctors find themselves in. Patients will return eventually. My hope: Doctors, like all Americans, will learn from this crisis how insidious debt can be—and how important it is to have a robust emergency fund.

John Goodell is a government attorney who has spent much of his career advocating for military and veterans on tax, estate planning and retirement issues. His biggest passion is spending time with his wife and kids. Follow John at HighGroundPlanning.com and on Twitter @HighGroundPlan. His previous articles were Average Is Great and Garbage Time. The opinions expressed here aren’t necessarily those of the U.S. government.

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Thanks, Younger Self

SAVING FOR the future entails a pinch in the present. Every so often, it makes sense to reconsider how much we save—and whether it’s time to take a break from saving. As a recent early retiree, I was pondering this, even before the latest stock market disruption.

Unfortunately, none of us has a reliable crystal ball that tells us when to buy low or sell high. We also don’t have complete knowledge of our future self. Maybe future me will receive a windfall or die young, so I can get by with saving less. Or maybe I’ll develop a chronic condition and need more savings. We don’t know how lucky we will be on the way from youth to retirement—those years when we have the greatest opportunity to save.

Savings aren’t “safe.” Risk is inevitable. Cash in an FDIC-protected bank account is guaranteed to keep its face value, but it’s also pretty much guaranteed to decline in real value each year due to inflation. Meanwhile, buying bad stock or bond market investments does little more than transfer your wealth to someone else. Recessions, market corrections and normal fluctuations can be difficult to stomach. And then we have occasional extraordinary events, like the economic and political disruptions caused by the coronavirus.

Faced with all this uncertainty, I don’t try to divine the future. Instead, in setting aside a portion of my money for future me, I’m simply seeking to maintain purchasing power for a comfortable old age. With moderate luck and ongoing financial education, I might be able to eke out a percentage point or three above inflation, opening the road to a more prosperous retirement.

I recently reviewed the Series EE and I savings bonds that I’ve purchased over the years. These ultra-conservative investments are rarely recommended. They’ve never been more than a fraction of my investments. The earliest bonds I own were bought through a payroll savings plan at work. I discovered some were no longer earning interest and I cashed them in at the bank. I will redeem the rest over time as they reach final maturity.

I still recall the pinch in my long-ago budget. But as I say goodbye to steady paid employment, I’m grateful for the early savings habit I adopted. Those small sums, stashed in savings bonds, will periodically make nice additions to my everyday life. My remaining bonds, purchased occasionally over the past 30 years, earn interest rates ranging from 2.18% to 5.96%. That’s less return, over the long run, than I would have earned on a total stock market index fund, but those bonds are a sure thing that look good now as part of my balanced portfolio.

I plan to buy more savings bonds, as well as make periodic purchases of a total stock market index fund. It won’t be as much as I contributed while working. Maybe each month I’ll save a sum equal to a week’s worth of groceries. Still, I’ll find it easier to sleep in my early retirement years knowing I continue to save a bit. And down the road, when I sell those investments, I’ll appreciate getting back that grocery money, which will make my uncertain future a little more comfortable.

Catherine Horiuchi recently retired from  the University of San Francisco’s School of Management, where she was an associate professor teaching graduate courses in public policy, public finance and government technology. Her  previous articles include Muddling Through, When It Rains and The Aftermath.

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Lost and Found

WHEN MY FATHER died in 2012, my mother gave me his wedding ring as a keepsake—but I lost it. I turned my house upside down trying to find it. When my mother was alive, I prayed she wouldn’t ask to see the ring, because I didn’t know what I’d tell her.

I felt terrible that I had lost something that meant so much to my father, and I was upset with myself for not taking better care of it. I know that I’m terrible when it comes to protecting my valuables. Like a dog that hides his bone, I hide things in my house—but forget where.

Some weeks ago, I was cleaning out my condo, as I prepared to move to my new home. I noticed a small plastic bag tucked in the back corner of a drawer. Yes, it was the missing ring. What a relief. I could breathe again.

While cleaning out my condo, I discovered other missing items:

I found $160 tucked between the pages of last year’s calendar.
I found $100 in an old Christmas card.
I found $20 in the back pocket of a pair of jeans.
I found some old gift cards that probably haven’t been used, but I need to check the card balances.

Why am I so careless with things of monetary value? I’m not a careless spender. I’m a saver who knows the value of a dollar. And yet I misplaced my father’s ring, which was not only a valuable item, but also a cherished possession.

That said, the thing that reminds me most of my father is not his wedding ring, but rather the garden clippers he used to trim plants in the yard. My father loved working in his yard. My mother would kid him about over-trimming the bushes.

I still use those same clippers when I’m gardening. When I hold those clippers, I swear I can see him—and touch him. He comes to life every time I grab those clippers.

The same thing happens when I look at my mother’s favorite shoes, which I keep in the same closet where I keep my shoes. Those shoes bring back memories of her going for her daily walk and the places we visited together. I can’t think of anything else that would remind me more of my mother than those shoes.

Sometimes, when we’re doing our estate planning, we get so involved with the financial side that we lose track of other things that might have special meaning for our loved ones. It could be your favorite writing pen, a purse or a photograph. After you’re gone, those possessions may help friends and family members deal with their grief.

Although I’m grateful for the financial benefits I received from my parents’ estate, I know it isn’t the money that brings back the most memories. Instead, it’s the things that have little or no value.

Indeed, we should have conversations with our loved ones not just about money, but also about the things that they may cherish in our absence. I know my parents would never believe that an old pair of shoes and the garden clippers would mean so much to me.

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 Keeping My Balance, School’s in Session and Be Prepared. Follow Dennis on Twitter @DMFrie.

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