Jonathan Clements's Blog, page 329

Change Our Ways?

MY PARENTS and grandparents were forever affected by the Great Depression of the 1930s. They shunned debt, paid cash for everything, never invested in stocks and kept their modest savings in the bank, mostly in a checking account.

Following the 2008-09 Great Recession, many Americans also changed their financial ways, at least temporarily. We increased our savings rate immediately after the recession. But a few years later, we returned to our high spending ways.

According to a 2019 Bankrate survey, 28% of Americans have no emergency fund, while 25% have some rainy-day money, but not enough to cover three months’ living expenses. Our retirement savings are no better. There’s still too much reliance on Social Security.

Speaking of which, let’s not forget that the pandemic is going to hurt Social Security’s trust fund. Unemployment and businesses closing mean less money in Social Security payroll taxes, plus unemployment and other financial problems often prompt people to claim retirement benefits earlier. Some predict the trust fund will be depleted two years sooner than expected, in 2032 rather than 2034. That means that—to keep benefits flowing—we may need higher taxes or lower benefits. Congress has been aware of the problems facing Social Security for more than 15 years and has done nothing. Will a pandemic motivate politicians to act?

The pandemic has also caused increased worry about health care costs. Social media is full of concern about workers losing their jobs and with it their health insurance. This has resulted in calls for a special enrollment period through the health care exchanges. But families who are affected should still be able to get coverage: The Affordable Care Act allows folks to purchase insurance upon loss of heath care coverage, even if that loss of coverage results from quitting your job.

There’s also been a focus on Americans who didn’t previously have health care coverage. Some have argued that, since they may face pandemic-related costs, they should be allowed to enroll immediately. It’s here my curmudgeonly instincts come out.

Remember, we aren’t talking about denying health care, but questioning who should pay. Nearly all individuals without coverage had six years to obtain insurance under the Affordable Care Act and yet they chose not to. An unrestricted open enrollment period encourages—and indeed rewards—irresponsible behavior. It’s like buying auto insurance after you drive your car into a tree. The Kaiser Family Foundation estimates the hospital costs for uninsured COVID-19 patients will be between $13.9 billion to $41.8 billion. That tab is expected to be paid from Coronavirus Aid, Relief and Economic Security (CARES) Act funds.

The bottom line: Many Americans are poorly prepared for both expected and unexpected life events. We spend more than we can afford, we carry too much debt and we don’t save. Many are underinsured for health care, disability and long-term care. Only 57% of adults have life insurance.

Will 2020 change our ways? The current pandemic, with its brutal combination of health crisis and financial destruction, should scare Americans into action, so they’re better prepared for future emergencies of all types. To accomplish this would require a change in lifestyle, with families living within their means so they can purchase the insurance they require and amass the emergency money they need. Will Americans make such changes? I’m not hopeful.

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

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Falling for Flattery

ARE YOU WORTH IT? According to many sellers, you are—even if they have no idea who you are.

Economics generally divides consumed goods into necessities and luxuries. But behavioral economists understand that we need luxuries, at least psychologically. Purchasing things for ourselves is a way to self-validate, to say we are more than our base needs.

Who hasn’t felt good about an accomplishment and used that as a reason to splurge, entering the feedback loop wherein the purchase then justifies and even heightens our initial good feeling? Conversely, when people feel bad about themselves or their situation, often the curative advice is to “pamper yourself,” to go on a shopping spree to forget your worries—even if those worries are about money.

Advertisers, aware of this vulnerability, try to tap into it. There are many small-scale but famous examples. McDonald’s told the world in the 1970s that “you deserve a break today” with a jingle that Advertising Age named greatest of the century. At the same time, L’Oréal Paris told women that they should buy its higher-end products “because you’re worth it.” The slogan was so successful that the phrase inverted to become the popular positive affirmation “because I’m worth it.”

It’s an old sales trick, but—like many marketing techniques—it keeps working because it’s a simple ploy that strikes at our base vulnerabilities. Even when we see the nudge coming, we accept it and take its direction.

Problem is, it can be an expensive trap, especially for high-end rewards. The up-and-comer who gets a raise might reward himself with an “executive” car, vacation or even a whole new home. But that reward comes at the expense of savings and, if it’s a long-term commitment like a home, raises expenses that can nullify the increase in income.

Savings and long-term investment can’t, it seems, compete with the instant gratification of “let’s just enjoy it today.” Maybe it’s no surprise that delayed—but greater—gratification usually doesn’t win out. For most, even the idea of an earlier retirement remains at best a hazy shadow on the horizon.

I don’t think many people spent their way into debt at McDonald’s, nor did too many women have existential crises weighing whether they were truly worth it. But these nudges add up to potent influences on our spending decisions and hence our savings rate, especially as the cumulative message is “spend more than you were planning—worry about the budget later.”

But later eventually arrives. Remember, spending today is borrowing from our future self. Whether or not we deserve a break today, we’ll really deserve and want a bigger break tomorrow. The crucial question: Will our future self regret the spending choices we make today?

Jim Wasserman is a former business litigation attorney who taught economics and humanities for 20 years. His previous articles include Buying Power, Weighty Decisions and Scenes From a Life. Jim is the author of a three-book series on teaching behavioral economics and media literacy,  Media, Marketing, and Me. His latest book is Summa, a children’s story for multiracial, multi-ethnic and multicultural families. Jim lives in Granada, Spain, with his wife and fellow HumbleDollar contributor, Jiab. Together, they write a blog on retirement, finance and living abroad at YourThirdLife.com.

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Look Around

WHEN I WAS in grade school, I remember a field trip to a highflying local company called Prime Computer. At the time—it was the 1980s—Prime was a Fortune 500 company with a popular line of minicomputers and a runaway stock. Today, Prime is long gone and barely remembered. A Wikipedia page is about all that remains.

For a long time, I didn’t understand this. How could a company so successful simply cease to exist? Prime, of course, isn’t alone in this phenomenon. The same thing happened to Blockbuster, Borders, Compaq and many others.

I didn’t learn the answer to this puzzle until many years later. In his book The Innovator’s Dilemma, Harvard professor Clayton Christensen provided this counter-intuitive explanation: When successful companies fail, it’s because of their success. What happens is this: As a company’s success grows, it pours its energy into doing more of what made it successful in the first place—building the next iteration of its product, then the next and then the next.

But as the company does this, its focus becomes more and more inward. And when it does that, it ignores the proverbial entrepreneur in the garage—the upstart competitor who is able to look at things with fresh eyes and thus develop something completely new.

Christensen died in January. It occurs to me that his concept of the innovator’s dilemma has special relevance today, as we struggle with the effects of the coronavirus. At its core, Christensen’s warning to companies was that they need to avoid being too narrowly focused.

This advice is also valuable for other spheres of life, including personal finance. Below are three specific aspects of personal finance where I believe you can incorporate Christensen’s thinking.

1. Investing. I often advise against stock-picking. The stock market’s behavior this year helps explain why. At its lowest point a few weeks ago, the S&P 500 was down 34% from its Feb. 19 peak. But that was just the average.

Across companies, there was—and continues to be—wide disparity. Airlines, hotels and cruise lines, as you would expect, fared much worse than average. American Airlines, for example, dropped 64%. Meanwhile, other companies performed far better. Amazon lost just 12%. Pharmaceutical companies, which are on the hunt for a coronavirus vaccine, actually saw their stocks rise. Companies in the videoconferencing business have also done very well.

Why am I mentioning this? Christensen’s point was that companies run into trouble when they ignore upstart competitors. But the reality is, competitors are just one of the many unpredictable factors that impact companies and their stocks. Today’s public health crisis is the latest example.

Looking back over the past 20 years, we’ve also experienced war, terrorist attacks and a financial panic. They each came out of nowhere and each impacted different stocks in different ways—some positive, some negative. This, in my view, is yet another reason to favor index funds over individual stocks or actively managed mutual funds. It’s just too hard to know what the future will bring.

To be sure, a few hedge fund managers have been proudly trumpeting their foresight in shorting stocks this year. But there’s a reason you can count these managers on one hand. For most people most of the time, it’s impossible to predict what’s coming.

2. Household finances. Later in his career, Christensen co-authored a follow-up book, The Innovator’s Solution, to help companies avoid becoming the next Prime Computer. While there was no silver bullet, he provided more than a dozen recommendations. His overall message: Never rest and never accept the status quo. While these may sound like platitudes, there are many ways to apply these ideas to your finances. Got more free time during this work-from-home period? Here are some specific steps:

Look into refinancing your mortgage. While many people just leave their mortgage on autopilot, this is an area where you could save tens or even hundreds of thousands of dollars over time. For a few weeks recently, banks were raising mortgage rates, despite the Federal Reserve’s actions to lower interest rates. But things have started to turn around, and I’m now hearing of very attractive rates.
Don’t ignore smaller expenses. As Benjamin Franklin pointed out, “A small leak will sink a big ship.” I would scrub your credit card bill for all the little recurring expenses that, in aggregate over time, might not be so little. Among the recurring charges you choose to keep, consider moving them to a separate credit card so you can keep an eye on them more easily.
Tried software like Quicken but found it too tedious? Check out newer tools such as YNAB and Tiller Money. If you find a budgeting system that works for you, it can pay big dividends, while helping you to feel a greater sense of financial control.

3. Financial planning. Many people are asking why the world wasn’t better prepared for today’s pandemic. After all, in recent years, we’ve seen SARS, Ebola and other outbreaks. And, of course, there’s Bill Gates’s now-famous warning from 2015.

So why didn’t we see this coming? One explanation: Our attention is too fragmented. With the 24-hour news cycle, Facebook, Twitter and so forth, it’s awfully hard to focus. This applies to our personal finances as well. With limited hours in the day, it’s very hard to spend time considering risks that seem outside the realm of the probable.

What’s the solution? Again, it might sound like a platitude, but you should think more broadly and consider a wider range of outcomes. In an interview, Christensen offered an important insight: “For whatever reason, the way they designed the world, data is only available about the past. When you teach people that they should be data-driven and fact-based… in many ways we condemn them to take action when the game is over.”

Christensen’s point is well taken: When planning your financial future, look beyond recent experience and look beyond what the experts are saying. Have not just a Plan A, but also a Plan B and a Plan C. Hopefully you’ll never need them. But it should help you to sleep easier, no matter what the future brings.

Adam M. Grossman’s previous articles include Under Pressure, Unpleasant Surprise and Keeping Busy . 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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Growing Conviction

IT’S BEEN AN unpleasant seven weeks for the stock market. Is it over? I have no clue. Still, last week’s rally offered investors at least a temporary respite. My suggestion: Use this moment to think about the market’s recent rollercoaster ride—and how you’ve handled it emotionally.

Financial experts distinguish between risk capacity and risk tolerance. It’s a useful distinction. Risk capacity is our objective ability to take risk based on our personal situation, notably the reliability of our paycheck and our investment time horizon. The most important rule: If we have savings that we’ll need to spend over the next five years, that money should be in conservative investments, not stocks or riskier bonds.

Meanwhile, our risk tolerance is our emotional ability to weather market turbulence—and it’s a reason we might keep less in stocks than our risk capacity allows. But how much risk can we tolerate? It’s an issue that has long confounded experts.

That brings me to one of my pet peeves: risk tolerance questionnaires. Years ago, I remember questionnaires that confused physical bravery with investment courage, which was absurd. Warren Buffett is renowned for making bold investment bets when things look darkest—and I don’t believe he has any inclination to jump out of airplanes.

Even today, questionnaires regularly conflate high risk tolerance with a willingness to gamble, which I also find absurd. Many who buy lottery tickets, go to Vegas or take an occasional flier on a stock are otherwise very conservative with their money. I don’t view betting on one or two stocks as an indication of high risk tolerance. Rather, I view it as a sign of foolishness—and, if that’s all I owned, I too might cut and run during a bear market, because I’d worry the stocks may sink and never recover.

But even if risk tolerance questionnaires could accurately assess our risk tolerance today, we might feel quite different tomorrow. Research has found that we’re more willing to take risk if we’re desperately trying to avoid realizing a loss, or we’re in a good mood, or we’ve lately enjoyed some financial success and we’re feeling flush.

Indeed, probably the biggest problem with our risk tolerance is that it fluctuates along with share prices. Experts in behavioral finance have identified a host of reasons. We grow overconfident during rising markets, attributing our fattened portfolios to our own brilliance. We also feel like we’re ahead of the game financially, often leading us to take yet more risk.

But when stock prices turn lower, our overconfidence ebbs away, our aversion to losses kicks in, and we take the market’s decline and extrapolate it into the future. Soon enough, we assume share prices have only one direction to go—down. Many folks freeze, neither buying nor selling, because they worry they’ll make the situation worse. But for some folks, the fear of further losses is overwhelming, and they panic and sell.

Knowing we’re susceptible to these mental mistakes can make us better investors. It certainly helps me. Like everybody else, I’ve suffered emotional whiplash through this turbulent period. On days when the stock market plunges, I feel a tightening in my chest and I instinctively assume further declines lie ahead. But I’ve learned to pause, shove aside such fears and shovel more money into stocks. It has, however, taken decades of investing to develop that mindset.

What if you’re newer to investing? Even if you have 30 or 40 years to invest, I’d err on the conservative side initially. The best way to assess our risk tolerance isn’t with a questionnaire, but by seeing how we react when the stock market declines. That’s how we learn what our true risk tolerance is. In other words, the best guide to our future behavior is our past behavior.

That said, as we get more market cycles under our belt, we may discover we become more risk tolerant. We’ve been through bear markets and realize they’re temporary. To be sure, some individual stocks and even entire industries may fall by the wayside. But the global financial markets eventually march higher—and that’s what we own if, like so many HumbleDollar readers, we’re devotees of total market index funds.

Indeed, investing through total market funds is a strategy that deserves our utmost conviction. That conviction—coupled with the self-knowledge born of experience—can bolster our risk tolerance.

This is good news, though the news is also a tad bittersweet. How so? As we grow older, our risk tolerance may rise. But our objective capacity to take risk typically declines, as we quit the workforce and start living off our savings. The upshot: We’ve finally grown comfortable with the stock market—only to discover that we need to take less risk.

Latest Articles

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

“Think in terms of half steps,” advises Adam Grossman. “If you’re considering reducing your portfolio’s risk level, rebalancing or completing a Roth conversion, don’t jump in with both feet.”
Should you lighten up on stocks? Rick Connor analyzes his finances using five questions posed by Morningstar’s Christine Benz.
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.
“If we can’t reliably predict which companies will succeed, we should just buy the whole stock market through low-cost index funds and bet on America for the long haul,” argues John Goodell.
One out of six retirees will spend at least $100,000 out of pocket on long-term care. How would you cover that cost? Dennis Ho offers some pointers.
After nearly a month at sea, two ships, four deaths and confinement to his cabin, Dick Quinn is finally home.
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.”
The tax code looks very different if you have a low income, as Rick Connor discovered.
“In the long run, I believe having an advisor will pay for itself by preventing me from making irrational decisions during both bad times and good,” writes Dennis Friedman.

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

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April Fool

HERE IS WHY I don’t trade, and don’t make big market bets, and why you shouldn’t, either.

Headlines last Monday at 6 a.m.: Nation Braces for Brutal Week, At Least a Fourth of U.S. Economy Goes Idle, British Prime Minister Boris Johnson Hospitalized.

Headline at 9:30 a.m.: Dow Surges as Tech Stocks Rally

I got spooked last weekend. It was epic. I was actually scared after days of hearing about the bungled federal response to the pandemic and about states fighting over medical supplies. I wasn’t about to sell stocks—I knew that would be a dangerous emotional reaction—but I felt compelled to warn family and readers that things would be even worse than most people expected. In initial drafts of this column, penned early on Monday morning, I wrote that I was preparing mentally for the worst bear market of my lifetime.

Three hours later, the market bolted to its sixth-best percentage gain in 87 years.

In the spirit of Stephanie Grisham announcing that she was stepping down as White House press secretary after never holding a single briefing, I can confirm here that I am no longer Wall Street’s most influential market strategist.

It’s so seductive and ego gratifying to believe we know something others don’t. I was bent sideways all day Monday, desperate to avoid admitting what I’ve actually known for a long time: I’m a reliable contrarian indicator. My thought process was thoroughly corrupted as I went through the stages of grief—on a day when I was making thousands of dollars, thanks to my portfolio’s 76% allocation to stocks.

Of course, one day’s or week’s market action doesn’t sound the all-clear. What if I really, really believe things are going to be much worse than the market expects? Frankly, my investment stance shouldn’t change much.

Our individual market outlook matters little as long as we’re invested within our risk tolerance. We can get modestly more conservative or aggressive, but we should never make major, sudden portfolio shifts. Buying when things seem safe and selling when we get scared is the Exhibit A of bad investor behavior.

After my March 25 article appeared, a few guys on social media took me to task for writing, “25% to 30% off the high is a good opportunity” to buy, which I had indeed been doing. No, they said, this market is heading lower. Most people will die and go bankrupt before the stock market recovers, wrote one poor socially isolated soul.

Guess what? The universe doesn’t care what you or I or unverified Twitter accounts think will happen next. But it does seem to reward us for observing basic truths, following simple rules and maintaining good habits. In the investment world, here are some of them:

Investing in a broad collection of company shares is your best chance to build wealth over the long term. No, it isn’t a guarantee, just your best bet.
Remaining invested at all times is the only way to ensure that you’ll capture such gains.
Understanding your risk tolerance, and using it to drive your allocation to stocks and bonds, can help you avoid selling in a panic.
Periodic rebalancing keeps your portfolio’s mix of stocks and bonds close to your predetermined targets—and commensurate with your risk tolerance.
Don’t overthink any of the above.

There’s another rule I should probably add to this list: Make sure your portfolio fits with your broader financial life. Which brings me to perhaps my biggest worry: My job is still in jeopardy. As a 58-year-old father of one recent college graduate and another preparing to participate in a virtual baccalaureate, my first responsibility isn’t investment growth, but ensuring I’ve got a big enough financial cushion to fall back on.

Therefore, I’m recommitting to a conservative stance outside of my retirement accounts. I have a decent chunk of cash in an online savings account, though not as much as I’d like. Now is a great time to save more, while I have no commuting costs and I can’t dine out.

On top of that, my employer recently suspended its 401(k) matching contribution. That prompted me to stop my own contributions and instead set up automatic transfers of the same amount to savings. Over the next year, I may make IRA contributions instead of funding the 401(k). But I’ll make that decision based not on my feelings about the stock market, but on the safety of my job.

It’s been another crazy week. I’m grateful that, when fear knocked, I may have answered the door—but I chose not to make a contribution.

William Ehart is a journalist in the Washington, D.C., area. Bill’s previous articles for HumbleDollar include Different This Time, Luck of the Irish and  No Sweat . In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart .

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Numbers Game

IT’S TAX SEASON—not something many of us look forward to. Although HumbleDollar’s readers may be ready and willing to tackle their own taxes, many others approach Form 1040 with dread. I’ve seen that firsthand.

This has been my second year as a certified volunteer tax counselor for the AARP Foundation’s Tax-Aide program, which offers free tax preparation for low-to-moderate income taxpayers, especially those age 50 and older. Earlier this year, Tax-Aide was providing this service at nearly 5,000 locations nationwide, but the program has been shut down because of the coronavirus. With the extension of the filing deadline from April 15 to July 15, AARP will  attempt to restart the service as soon as it’s allowed.

Last year, as a new volunteer, I had three or four days of training and had to pass three tests. This certified me as an advanced counselor, qualified both to complete tax returns and to check returns generated by other counselors. In 2019, I worked three days a week at two different centers.

My first year was an eye-opening experience. Although I was comfortable doing my family’s tax returns, and familiar with TurboTax software, doing a complete stranger’s return was stressful. Most of the clients were senior citizens with modest incomes. Many were widowed. Some were even my neighbors.

I quickly realized there were areas of the tax code I’d never encountered, but which were important to my clients. Many of these provisions apply as we head into retirement and get into our 60s. Others are more important to lower income taxpayers, as well as those with elderly parents.

For example, Pennsylvania has a tax forgiveness provision for lower income taxpayers. Depending on your income and family size, you may qualify for a refund or reduction of your Pennsylvania income tax liability. But the software we used didn’t automatically check to see if a taxpayer was eligible. Instead, you had to manually initiate the calculation.

On one of the first returns I completed, a senior counselor gently informed me that I should have checked for state tax forgiveness. It turns out the client was eligible, and it wiped out a state tax bill of several hundred dollars. I learned to check for this every time, even if I thought a client probably wouldn’t qualify. This is the kind of tax provision that a new retiree may be eligible for, but not know about.

I quickly realized how much people count on the various credits, refunds and rebates available. Folks get used to being eligible for these things and, if something changes, it can be a big shock. One of my worst days involved explaining to a single mother that her oldest son had “aged-out” of eligibility for the earned income tax credit, and that her refund would be significantly less than the previous year’s. The issue: Her 19-year-old had taken a semester off and wasn’t considered a fulltime student. Children older than 18 and under 24 must be a fulltime student for at least five months during the year to qualify. Like many interconnected parts of the tax code, his decision to take time off had a major impact on his mother’s tax situation.

I discovered that one of the biggest sources of confusion were the many definitions of income. The federal and state tax codes have multiple definitions. Take Social Security. If you claim benefits before your full Social Security retirement age of 66 or so, you’re restricted in how much income you can earn before your benefit is reduced. For this purpose, the tax code uses earned income from a job or self-employment. Your spouse’s income doesn’t come into play.

The tax code, however, uses a completely different definition of income when determining if a portion of Social Security is subject to income taxes. To see if your benefits are partially taxable, you calculate your “combined income.” What’s that? It’s your family’s adjusted gross income, plus municipal bond interest and half of your Social Security benefit.

Timing is also an important concept in taxes. Many provisions are tied to the taxpayer’s age. For example, at 65, a taxpayer’s standard deduction goes up.

You can also take certain actions up to the tax-filing deadline—July 15 this year—that’ll impact the previous year’s tax return. Perhaps the best known of these provisions is the ability to fund an IRA for the prior year right up until July 15. You can use this flexibility to trim your taxes, potentially turning a tax bill into a refund. If you time it right, you could even file your taxes, claim a deduction for an IRA contribution, get your refund and then use that refund to help make the previous year’s IRA contribution.

I even saw how a late IRA contribution could help a family with the premium tax credits available for health insurance under the Affordable Care Act. Those tax credits can reduce monthly premium payments for health insurance bought through one of the health care exchanges. The amount of the premium tax credit is based on that year’s expected adjusted gross income and how it compares to the official federal poverty level.

When preparing one family’s tax return, it became apparent that their income was significantly more than they’d estimated at the beginning of the prior year, when they claimed the credit. In fact, they had passed the upper income limit of 400% of the federal poverty level. That meant that all the premium credits they’d received the previous year had to be reimbursed. By running some calculations, the counselor showed that—if the couple made the maximum IRA contribution—it changed their multi-thousand-dollar tax bill into a modest refund.

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 Should You Sell, This Too Shall Pass and Think Like a Retiree . Follow Rick on Twitter  @RConnor609 .

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Home at Last

BELIEVE IT OR NOT, when we were heading into Port Everglades, Florida, hoping to disembark in a few hours, there were mixed emotions. Sure, we wanted off the boat and to be home. But we had been at sea for nearly a month and we humans easily fall into routines. Once home, no one would be setting a tray of food at our condo door three times a day. Our last meal on the ship was filet mignon and lobster tails. Most likely, it’s going to be canned soup for the next few days.

But my wife and I are indeed home. On April 3, we were loaded on a bus bound for Fort Lauderdale airport, where a chartered plane waited. Police escorted the buses, with no stopping for red lights. What followed were flights to Atlanta, then Charlotte, then Newark, New Jersey. There was one highlight to report. Have you ever seen a flight attendant drop a can of soda, which then explodes all over the cabin and on the passengers?

I found it curious that, after weeks of being quarantined, we were packed on a bus with 50 other people from the cruise and then on a plane with 200 of the same people. So much for social distancing. As soon as we were on the bus, the scammers started. I received a text from someone claiming to be the driver who was picking us up at the airport in New Jersey. I later learned others did, too. I hadn’t made any reservations. Upon landing, I and others received phone calls from Germany. I ignored the call, but a few travelers answered and found another car service scam. At least one traveler lost several hundred dollars by giving his credit card number to a bogus car service.

Our welcome home was not as expected. A few residents in our condo community had kept others informed of our plight. As a result, we were treated as if we were lepers. Our building was designated for extra cleaning. We were asked not to use the elevator, pick up our mail or leave our unit. Yes, I get it, people are scared. But other folks on the same trip were treated differently by their friends and neighbors.

In 2020, we have been inundated with information, much of it inaccurate or misleading. That’s nothing new, of course. During my working years, I occasionally gave newspaper interviews. A misquote on the front page of The Wall Street Journal almost got me fired. Unfortunately, much of what was reported about our cruise was inaccurate, some of it media hype and some of it individuals misusing social media. Stressful situations bring out a variety of qualities in people, not all of them good. Earlier this week, I gave an interview to a New Jersey newspaper because I wanted to set the record straight. I hope I don’t regret it.

Once the emotional issues pass, the practical ones must be handled. Holland America has said it will refund much of the cost of the cruise. But there’s another major expense I’m still grappling with.

We were initially told our cruise was ending in Punta Arenas, Chile, and that we needed to book flights home from there. But then Punta Arenas refused to let us dock and those flights had to be canceled. I had booked flights with two different airlines for our group of five travelers. United Airlines promptly credited my charge account. But Latam Airlines has been ignoring my calls, as well as my claims submitted via its website.

Now, I hope my credit card won’t charge me interest on the $3,100 I refuse to pay. I’ve formally disputed the charge, but nothing has happened. These days, it’s impossible to talk with customer service representatives. My insurance companies, bank and the airline all say they aren’t taking calls.

We were among the fortunate travelers. Some are still quarantined on the Zaandam, anchored 12 miles off the Florida coast. Many in the crew are also trapped and haven’t been home in months. Some of our fellow escapees missed flights home. A few foreign travelers were denied a flight to their home country.

I look back on all that’s happened, our cruise ship that countless ports turned away, the time spent quarantined in our cabin, the deaths on board. I recall how I was initially concerned with the stock market and with the decline in my net worth. What fools we mortals be.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. This is Dick’s fifth and final article about his ill-fated cruise. The earlier articles were At Sea, Seasick, Barely Afloat and Shore Thing. Follow Dick on Twitter @QuinnsComments.

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Don’t Ignore It

AS BABY BOOMERS and Generation X march toward retirement, they face a daunting issue: What steps should they take, given the risk they’ll require long-term care?

Long-term care—defined as needing help with activities of daily living such as bathing, dressing and eating—is something that almost 70% of retirees will require at some point, according to LongTermCare.gov. Problem is, Medicare only provides limited coverage.

Yes, Medicaid does cover long-term care. But it was designed as a last resort for low-income folks. To qualify, your assets must be virtually exhausted. That could leave your spouse living in poverty, plus it eliminates the chance of bequeathing significant sums to your family or favorite cause. And even then, if Medicaid is paying, your care options will likely be limited.

The upshot: Because of the high likelihood of needing care and the limited government assistance available, preparing for possible long-term-care costs should be on the agenda for all of us.

Based on Genworth Financial’s 2019 Cost of Care survey, it costs an average $4,385 per month in the U.S. for a fulltime home health aide and $8,517 per month for a private room in a nursing home. According to a 2016 study by the Department of Health and Human Resources, one out of six retirees will spend at least $100,000 out of pocket for long-term care. In extreme cases, where someone is diagnosed with dementia, 24-hour care could be required for many years. Because of this risk, many people turn to insurance. But before doing that, take five steps:

1. Get a handle on costs. Depending on where you plan to retire, the cost of care can differ sharply. For example, a private room in a nursing home costs $12,745 per month in Seattle, but only $8,669 in Atlanta.

To get a sense for the bill you might face, try Genworth’s Cost of Care calculator. Get the cost of a fulltime home health aide, assisted living facility and private room in a nursing home in your area. For example, in Richmond, Virginia, those costs are $4,576, $4,848, and $9,292 per month, respectively. These benchmarks are a good starting point for planning.

2. Set a coverage goal. While it would be great to have enough to cover a private room in a nursing home for 20 years, that’s not realistic for most people—and, frankly, not necessary, since most people today receive care at home or in an assisted living facility.

As a starting point, consider having enough to cover an assisted living facility for up to three years, which is about the average length of time that people require care. You can then adjust based on your comfort level. For example, based on the Richmond numbers above, this would mean being able to cover $4,848 per month for 36 months, for a total of $174,528. This exclude inflation, which we’ll get to later.

In my case, being the paranoid actuary that I am, I would likely set a higher target—maybe 50% higher. But others might be okay with the average or even target less coverage. There’s no right answer. The most important thing is to set a coverage target that’s comfortable for your risk tolerance and situation.

3. Consider what’s important. Once you’ve set your coverage goal, it’s time to assess your ability to fund it. A simple way to approach this: Organize your retirement resources into two categories—income and assets.

Income includes Social Security, pensions and other monthly income you expect to receive in retirement. How much of this monthly income would you be able to tap if you needed long-term care? It’s a similar exercise when you look at your assets. We’re talking here about retirement accounts, regular taxable accounts, second homes and other assets you own. Ask yourself how much of these assets you’re comfortable setting aside for long-term-care costs.

As part of this exercise, do an honest assessment of your priorities. If it’s important to you to leave an inheritance for your children or you want to keep the vacation home in the family, exclude those assets from the resources available to pay long-term-care costs. If you’re married, be careful about relying on income or assets that are tied to one spouse. For example, if one spouse receives a lifetime pension that you assume will cover some long-term-care costs, what happens if that spouse dies first and the surviving spouse needs care?

4. Determine your coverage gap. Now that you have a clear assessment of your coverage goals and the money available, you’ll have a handle on whether you’re likely to come up short. For example, if your goal is to cover $5,000 per month for three years, and you have a pension and other income that can cover $2,000 per month, then your net need is $3,000 per month for three years, or $108,000.

If you have another $60,000 in assets that you’ve set aside for long-term care, then your coverage gap is about $48,000. One note about inflation: If the resources you set aside for care will generally grow with inflation—let’s say your pension has inflation adjustments or the assets are invested in the stock market—then it should be okay to look at things in today’s dollars. But if not, you’ll want to plan for higher long-term-care costs down the road.

5. Fill the gap. Once you’ve determined your coverage shortfall, the last step is to decide if and how to fill it. In the case of the $48,000 gap above, you might decide that’s a risk you’re comfortable with and do nothing about it. But if you do want to fill the gap, be sure to compare all your options.

For instance, could you live on less, so you allocate more of your assets or income to a long-term-care fund? If you’re still working, could you save a bit more or work a few extra years? Are there any changes you can make to your retirement priorities to free up additional assets? Should you consider a part-time job in retirement?

Like retirement planning in general, it’s important to plan well in advance, so you can take advantage of compounding and so you have a wide array of options still available to you. If you start planning in your 40s and 50s, that’s ideal. But if not, the sooner you begin, the better. One option to consider: insurance. Despite the negative headlines, long-term-care insurance can be affordable, especially for those in good health. In my next article, I’ll discuss how long-term-care insurance works and how to select the right policy for you.

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 Like Old Times, Value for Your Cash and Waiting Game. Dennis can be reached via LinkedIn or at dennis@saturdayinsurance.com.

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Average Is Great

I RECENTLY discussed retirement plans with my old college roommate, Joe, who now runs his own business. As we wrapped up the conversation, Joe asked if I had any book recommendations.

I told him I was about to start Good to Great, the management book by Jim Collins. It’s been a huge bestseller, with four million copies sold. Joe immediately shot back, “John, that book demonstrates precisely why low-cost index funds have to be the answer for most retirement plans. Read it and you’ll see what I mean.”

Initially, I thought Joe was talking about fees, but he wasn’t. Instead, he was referring to the other major reason to own low-cost index funds: diversification.

In seeking to find the best companies—those that go from good to great—Collins had uncovered some general truths about what constitutes the best leaders for a business organization. Collins posits that these leaders end up leaving their companies enduringly better. Did they? Here are some of the great companies that Collins identified:

Circuit City, which went bankrupt in 2008, in part because of the rise of Amazon and online shopping.
Fannie Mae, which effectively imploded during the Great Recession, thanks to bad lending.
Wells Fargo, which has been mired in the fallout from its creation of millions of sham customer accounts.

Clearly, time has proved how difficult it is for the great to stay great—or even good in some cases. To be fair, Collins profiles some companies that haven’t performed nearly so poorly, such as Nucor, Abbott Labs, Kimberly-Clark, Kroger and Walgreens (though the last two have also struggled because of online shopping and the behemoth that is Amazon).

Changes in business models, and disruption caused by low-cost competitors and new technology, happen to the best of companies. Everyday investors can’t reliably predict these things. Even professional money managers struggle to anticipate such changes.

Jim Collins’s thorough research affords today’s readers of Good to Great a tremendous advantage—that of hindsight. He’s demonstrated how difficult it is to identify companies that are enduringly great. (For those curious to read a critical analysis of Good to Great, I recommend The Halo Effect by Phil Rosenzweig.) All this is bad news for investors hoping to profit by buying stocks of great companies run by great leaders.

What to do? My answer is simple: If we can’t reliably predict which companies will succeed, we should just buy the whole stock market through simple low-cost index funds, collect the performance of the market average and bet on America for the long haul. If Warren Buffett, the investing world’s G.O.A.T. (or greatest of all time), couldn’t see that Wells Fargo was committing fraud to juice its numbers, clearly a goat (meaning the farm animal) like me can’t, either.

I participate in the federal government’s Thrift Savings Plan. Each of the retirement plan’s investment options holds a broad collection of securities from whatever market sector it’s seeking to track, plus this diversification comes with very low fees.

Not everybody is so lucky. For those businesses and local governments who have high fee plans, I hope they’ll consider changing, so they offer what’s best for their employees. When you put plan sponsors second and your employees first—beginning with the retirement plan—you take a crucial step in helping your organization go from good to great.

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 article was Garbage Time. The opinions expressed here aren’t necessarily those of the U.S. government.

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Keeping My Balance

I MET WITH MY financial advisor last week to discuss my portfolio’s performance in the first quarter. This was the first time I’d looked at my investments since the start of the public health crisis and economic shutdown.

My portfolio, with a target mix of 35% stocks and 65% in bonds and cash investments, was down 6.8% for the quarter, while the S&P 500 was off 19.6% and the Dow industrials fell 22.7%, including reinvested dividends.

So far, my portfolio has done what it was designed to do—that is, to survive a financial crisis without suffering life-changing losses. To be sure, my investments will underperform during a bull market. But I’m willing to make that sacrifice. At age 68, my goal is to own a low-risk portfolio that can limit my losses in a down market, while having enough growth in principal to keep up with inflation.

My portfolio is composed of broad-based Vanguard Group index funds. It was created by my financial advisor with my input. My investment mix prior to our recent meeting was as follows:

Stocks

17.7% Vanguard Total Stock Market ETF
13.1% Vanguard Total International Stock ETF

Bonds

14.1% Vanguard Short-Term Bond Index Fund Admiral Shares
25.7% Vanguard Intermediate-Term Bond Index Fund Admiral Shares
5.6% Vanguard Long-Term Bond Index ETF
19.2% Vanguard Total International Bond Index Fund Admiral Shares
4.6% Vanguard Prime Money Market Fund

My advisor decided it would be a good time to rebalance my portfolio. He thought we should boost the stock allocation back to the 35% target. He also thought we should shorten the duration of the bonds. He suggested increasing the sum in the short-term bond fund, while reducing the intermediate bond fund, so they would have equal weighting. He also switched the international bonds from a mutual fund to an ETF to benefit from the lower fee.

Here’s how my portfolio looked after it was rebalanced:

Stocks

20.7% Vanguard Total Stock Market ETF
14.2% Vanguard Total International Stock ETF

Bonds

16.8% Vanguard Short-Term Bond Index Fund Admiral Shares
16.8% Vanguard Intermediate-Term Bond Index Fund Admiral Shares
8.4% Vanguard Long-Term Bond Index ETF
18% Vanguard Total International Bond Index ETF
5% Vanguard Prime Money Market Fund

Although my portfolio is down for the year, I’m satisfied with the results. It shows that holding a diversified high-quality bond portfolio can lessen the impact of a bear market. I believe my nest egg is large enough that I can take this more conservative approach and still enjoy a comfortable retirement.

You might ask, “Why didn’t you just put all your money in a target-date fund and save the cost of hiring an advisor?” You’re right, I could have bought the Vanguard Target Retirement Income fund or the Vanguard Target Retirement 2015 fund, and probably met my financial goal of seeking current income with minimal risk.

But I’m willing to pay the 0.3% fee to have an advisor I can talk to. It has a calming effect on me, allowing me to sleep at night when all hell is breaking loose.

At times like this, an advisor can be worth his or her weight in gold. Indeed, in the long run, I believe having an advisor will pay for itself by preventing me from making irrational decisions during both bad times and good. When it comes to our investment results, the market’s performance is important. But even more crucial is our own behavior.

The same, of course, can also be said about most things in life—including the coronavirus. According to public health officials, there’s no magic bullet to protect us from this insidious disease. Instead, our best defense is staying at home, physical distancing and washing our hands frequently. Want to protect both your health and your portfolio? Think carefully about your own behavior.

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 School’s in Session, Be Prepared and Bearing Up. Follow Dennis on Twitter @DMFrie.

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