Jonathan Clements's Blog, page 341

Return on Investment

MY WIFE AND I spent Thanksgiving on the Outer Banks of North Carolina. For 25 straight years, we���ve gathered there with my wife���s extended family to spend the week of Thanksgiving at the beach.

It started with about 15 of us in 1994, all in a seven-bedroom house. Over the years, the family���and the size of the house���have grown significantly. This year, we had 39 in attendance, representing four generations. For the past five years, we have rented a 22-bedroom, 15,000-square-foot house. It has four floors, two hot tubs, a rec room and a theater room. Sounds pretty luxurious, doesn’t it?

But we rapidly adapt to luxury and soon find the faults. Some of the faults are real, others not so important. Next year, we expect to have 43 people, including two new members. The family is growing, so we have rented a brand new, 27-bedroom beachfront house for 2020. The floorplans look amazing and we���re all excited to experience the new house next year.

As the houses have grown bigger, and more spectacular, so have the prices. When we started, the rent for the Thanksgiving week was the same as the weeks before and after. But Thanksgiving on the beach has gotten popular. Now, it is common for that week���s rent to double from the weeks before and after. Same for the week surrounding Christmas and New Year���s.

Over the years, we have struggled with the increasing cost. My early data is rough, but it appears that the cost per bedroom per night has gone up from $45 to $74, figured in today���s dollars. The cost has been mostly borne by what I call the five families���my wife and me, and her four siblings and their spouses. We���ve had many discussions about the affordability and value of this annual gathering, but we keep coming back.

Over the years, a variety of traditions have been adopted. They have become part of the fabric of our family. Cooking, fishing, playing games, football, wine tasting, board games, puzzles and countless other activities are a daily part of our week. Catching up with siblings, nieces, nephews and cousins is one of my favorite things to do. The relationships that have been built, grown and strengthened are priceless.

We���ve been doing this for a quarter of a century and that seems a good time to evaluate this tradition���s return on investment. We have seen our children grow up, move out, marry and start their own families. They now have lives that are busy with work and children���s activities. But they make the effort to get there, year after year. The commitment to family by the next generation is inspiring.

Why is this so important to everyone? It���s a great example of how to get the most out of our money: We���re spending not on things, but on experiences���the experience of spending a week building relationships across multiple generations. This might be considered a luxury by some, but I���ll happily pay for it any time.

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 Decision 2020,��Our Charity��and��Solo Effort. Follow Rick on Twitter��@RConnor609.

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Thanks for Nothing

AFTER TAKING the Series 65 exam in February, I set a goal for 2019: Help 10 friends and family members with their finances. Instead of giving specific investment advice, I wanted to educate them on money matters. I knew that they would benefit from one-on-one discussions, well-regarded books, educational videos and credible websites. But I also suspected that some might hesitate to talk to me about their finances. Nonetheless, I gave it a try.

Everyone showed interest and made time���except Aisha, a close friend. She hesitated for two reasons. First, she had a financial advisor and saw little value in educating herself. She figured if she was paying top dollar for advice, she was guaranteed top-notch results. Second, she worried about straining her relationship with her advisor by asking questions she���d never asked before. I insisted that, given the stakes, it was better to be informed than nice. Aisha reluctantly requested that her advisor send along cumulative portfolio performance reports.

A little history about Aisha���s investments: Many years ago, she���d received a windfall that she needed to invest. She interviewed a few financial advisors and went with someone who had an impressive job title, a long list of designations and a friendly demeanor. She regularly reviewed her portfolio with the advisor, but never considered there might be performance problems. After all, a paid professional ought to do better than the market, not worse���or so she thought.

As it turned out, her portfolio had more than doubled over 16�� years. Aisha was impressed, until she backtested an identical asset allocation���one with half U.S. stocks and half corporate bonds. A 50-50 allocation consisting of just two broadly diversified index funds would have quadrupled her money over the same holding period. She stared at the results in disbelief. The opportunity cost was huge.

Why such dismal returns? The extent of the underperformance surprised me, too. The account statements included some of the usual suspects���high asset management fees, numerous miscellaneous charges, expensive load funds and so on. Yet it explained only half of the performance drag. We dug further into the account���s trading history to figure out what else had gone wrong.

There was only one possible explanation: wrongheaded stock-picking and market-timing decisions. The advisor���s efforts at active management went on and on, despite persistent underperformance, higher volatility and tax inefficiency. Aisha���s investments made money, thanks to the long-running bull market. But that gain obscured the miserable underperformance relative to a simple portfolio of index funds.

The findings shook Aisha���s belief in professional financial advice. Still, she needed to consider the overall value she was getting from her advisor. Portfolio performance is only one dimension. A good advisor also helps clients with financial planning and provides emotional support, especially during market gyrations. Aisha thought long and hard about what to do���and, a few weeks later, decided there was no reason to continue with her advisor.

It strikes me that Aisha, and perhaps many others who are in the same boat, turn to advisors for the wrong reasons. Here are four of Aisha���s biggest misconceptions:

I lack the expertise. Unless you have a complex financial situation, managing your own money requires commonsense and discipline, not a PhD in economics or finance. There are many books, videos and websites available that can help educate investors.

I don���t know how to turn an investment plan into action. Improved technology, coupled with the proliferation of low-cost index funds, have made investing simple. Many easy-to-use financial tools are available for free.

I don���t have the time. A few hours spent on basic investment education is time well spent. After that, it takes very effort to put what you learn into practice.

I won���t have guidance if I need it. Competent, fiduciary advisors are available for onetime or occasional guidance. Looking for an advisor who charges by the hour? Two good places to start are the Garrett Planning Network and the National Association of Personal Financial Advisors.

A software engineer by profession, Sanjib Saha is transitioning to early retirement. His previous articles include Blessing in Disguise,��Bonding With Bonds��and Measuring Up.��Self-taught in investments, Sanjib passed the Series 65 licensing exam as a non-industry candidate. He’s passionate about raising financial literacy and��enjoys helping others with their finances.

Do you enjoy articles by Sanjib and HumbleDollar’s other contributors? Please support our work with a donation.

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An Unkind Act

AS IF ON CUE, Ebenezer Scrooge recently showed up in Washington, DC. The result wasn���t pretty.

A bill known as the SECURE Act,��a favorite��of the insurance industry, had been stuck in Congress all year. But suddenly, on Dec. 20, it got tacked onto another bill and signed into law. As far as I can tell, the primary beneficiaries of this new law, which heavily impacts retirement plans, will be the IRS and the insurance industry���but probably not you.

It���s the holiday season, though, so I���ll start with the few positive aspects of the law. The biggest benefit is a change to the rule governing required minimum distributions (RMDs) from retirement accounts. Under current law, if you have an IRA, 401(k) or other tax-deferred retirement account, you must begin making withdrawals in the year that you turn age 70�����or the year after, at the very latest. Because these withdrawals are subject to income tax, and because they increase as you get older, RMDs are loathed by many retirees. Fortunately, the new rules provide some relief: 70�� has become 72.

This new RMD rule is paired with another potential benefit for those in their 70s: Under 2019���s rules, even if you���re still working beyond 70��, you���re no longer permitted to make IRA contributions. This restriction has deprived many workers of a convenient savings vehicle and the associated tax deduction. The SECURE Act removes this age cap, allowing workers of any age to continue making IRA contributions.

But that���s where the good news ends. At first glance, making additional IRA contributions seems like a good thing. But what the government is giving with one hand, it’s taking with the other���and much more significantly.

Under current rules, if your children inherit your retirement account, they are subject to required minimum distributions, but on a very modest schedule. If you inherit an IRA and you are age 50, for example, you are required to withdraw just 2.9% of the balance in that year. Even at age 65, the RMD percentage is just 4.8%. This is important because inheritances tend to arrive during children���s peak earning years���when additional taxable income is typically both unnecessary and unwelcome. That���s why the current rules, which permit very modest distributions, are so attractive.

As of Jan. 1, 2020, all this changes. Under the new rules, children inheriting retirement accounts will have to withdraw the entire balance within��10 years. Fortunately, with some planning, you can mitigate the impact of the new rules. Here are five steps to consider in the coming months:

1. Don���t panic.��While I don���t like the new rules, the first thing I���d do is run the numbers. The impact may not be so bad. For example, suppose you leave a $1 million IRA to your children. If you have three children, that���s $333,000 each. Even under the new rules, if they spread the withdrawals evenly over 10 years, that would be $33,000 per year. Yes, that���s far more than the old rules require, but hardly catastrophic.

2. Asset allocation.��Ideally, under the new rules, you���ll want your IRA to be the slowest-growing portion of your overall assets. To some extent, you can control this with asset allocation. In other words, if you���re going to own bonds, you might own them in your traditional IRA, while holding stocks in other accounts.

3. Roth conversions.��These can be very attractive during the period between when you retire and age 72���years when your income, and thus your tax rate, are unusually low. For many, the new rules make this strategy even more attractive. Since Roth withdrawals are tax-free, they can help your heirs sidestep the tax bite of the new 10-year rule. If you think your tax rate during the early years of your retirement will be lower than your children���s, this could make a lot of sense. To the extent that you aren���t sure, remember that you can do partial Roth conversions. It isn���t all-or-nothing.

4. Charitable contributions.��You can satisfy your own RMD, and reduce your heirs��� future RMDs, by making qualified charitable distributions directly from your IRA. If you have charitable intentions, this has always been a useful strategy. But under the new rules, you may want to make it more of a priority.

5. Beneficiary designations.��Be sure to review the beneficiary designations on each of your retirement accounts. Assuming you have named your children, I���d make sure the ���per stirpes��� option is selected. When the time comes, this will give your children the option of disclaiming their inheritance���either partially or entirely���thus allowing that portion to flow through to their own children. This entails its own set of considerations. But fortunately, you don’t have to worry about that. As long as you have the right beneficiary structure in place, your children can each make their own decision after your death.

Adam M. Grossman���s previous articles��include The REIT Stuff,��Candy Land��and��Owning Oddities . 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 .

Do you enjoy the articles by Adam and HumbleDollar’s other writers? Please support our work with a�� donation .

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He Can Be Taught

DEAR READER, I may write for you. But I also write for myself. Many of my articles grow out of intriguing ideas I stumble across or half-baked notions I want to explore further. The next thing I know, I���m scouring the internet for additional information and typing furiously on my laptop, all because I���m interested���and I hope you will be, too.

The good news is, after 34 years of writing about finance, I���m still learning things and still tripping across topics I���m curious about. Here are just six of the subjects that sparked my curiosity in 2019:

1. Health savings accounts. In recent years, I���ve had health insurance with a high deductible. But the insurance I���ve bought has never met the government���s official definition of a high-deductible plan, so I haven���t been able to fund an accompanying health savings account, or HSA. Result: I���ve largely ignored the merits of these accounts���a significant oversight on my part.

But over the past year, a number of HumbleDollar���s writers have mentioned HSAs, and it���s dawned on me what a bonanza they can be. You get a tax deduction for your contributions, which can be as much as $3,550 in 2020 if the health plan only covers you, and even more for households and those age 55 and older. All withdrawals for medical expenses are tax-free.

A smart strategy: Leave the account to grow tax-free and then use it to cover medical expenses in retirement. You can even save receipts for medical expenses that weren���t reimbursed by the insurance company and then use those old receipts to make tax-free withdrawals years later.

2. Health insurance. Just as I ignored HSAs, I didn���t bother much with the details of health insurance until I read an eye-opening article from one of HumbleDollar���s contributors, Rick Connor.

Rick���s suggestion: When looking at health insurance, calculate what your minimum and maximum payments will be over the next year. The minimum is the total annual premium. The maximum is that annual premium plus the out-of-pocket maximum. It���s an easy calculation���and it allows you immediately to grasp the best- and worst-case scenarios.

3. Paying down debt. I���ve long favored paying down debt over buying bonds. But it was only this year that I pondered a host of different scenarios, trying to figure out when it might make sense to buy bonds instead.

The answer: almost never. That���s true even if you���re considering mortgage debt, which typically carries a low interest rate and is potentially tax-deductible. Thanks to the higher standard deduction introduced by 2017���s tax law���and thus the limited gain, if any, that comes from itemizing���you���re almost always better off paying down your mortgage, even if the alternative is to buy bonds in a Roth account, with its tax-free growth.

4. Roth conversions. The 2017 tax law elongated federal income-tax brackets, so you can have a heap of income taxed at 10%, 12%, 22% and 24% before you leap to the 32% tax bracket. As HumbleDollar contributor John Yeigh noted in an article earlier this year, this opens up the chance to convert large sums from a traditional IRA to a Roth and still have the money taxed at 24% or less. It was an opportunity I hadn���t spotted, but I now hope to exploit.

For instance, in 2019, it takes some $346,000 in total income before a couple ends up in the 32% tax bracket, while for a single individual it���s $173,000. This assumes you take the standard deduction. Bear in mind that this opportunity could be time limited: Federal income-tax rates are currently scheduled to increase in 2026.

5. Saving ourselves. As with paying down debt, I���ve long stressed the importance of saving. But I finally ran the numbers���and even I was astonished by how much of our ultimate retirement nest egg will likely consist of the raw dollars we sock away. The reality: Perhaps half or more of the money we amass by age 65 will be represented by the actual dollars we set aside for retirement.

6. Stock market valuations. For not just years, but decades, I���ve written about the U.S. stock market���s rich valuations, including lofty price-earnings ratios and miserably low dividend yields. But what if the problem isn���t the price of stocks, but rather the yardsticks we use to measure them? In November, I explored whether fundamental changes in the way companies operate, including the use of stock buybacks and the emphasis on research and development instead of capital improvements, could partly explain today���s apparently nosebleed valuations.

When the article appeared, I expected a flurry of complaints from stock market bears, dismissing me as an apologist for overpriced stocks. But I heard barely a peep. The implication: Either there���s broad agreement that today���s valuation metrics are sending the wrong signal���or the market���s bears have been beaten into submission.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook .��His most recent articles include Hits 2017-19, Just Do It��and��Eyes Forward . Jonathan’s ��latest books:��From Here to��Financial��Happiness��and How to Think About Money.

HumbleDollar makes money in four ways: We accept��donations,��run advertisements served up by Google AdSense, sell merchandise and participate in��Amazon‘s Associates Program, an affiliate marketing program. If you click on this site’s Amazon links and purchase books or other items, you don’t pay anything extra, but we make a little money.

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Hits 2017-19

IT’S BEEN THREE years since I launched this site���and I’m still not very good at guessing which articles will attract readers and which will go largely unnoticed. Partly, it’s the nature of the internet: The articles that rack up the most page views are often those that get promoted on other sites, and I have no control over that.

Still, I think the top 20 articles from HumbleDollar’s first three years make an intriguing list, all offering either great insights or lively writing, and often both. It may sound perverse, but I take pride in the fact that���of the five most popular articles���not one was written by me. HumbleDollar has become a place to showcase the stories and ideas of folks who enjoy writing about personal finance, but who often have no other connection to Wall Street.

Terms of the Trade
Farewell Money
Still Learning
Don’t Get an F
Ten Commandments
The Tipping Point
Enough Already
Unanswered
The $121,500 Guestroom
45 Steps to Success
Over Coffee
Second Childhood
Retiring: 10 Questions
Oracle of Boston
ObliviousInvestor
Making a Difference
Ten Commandments
Yes, It’ll Happen
Best Investment 2018
Cash Back

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook .��His most recent articles include Just Do It,��Eyes Forward��and��Low Blows . Jonathan’s ��latest books:��From Here to��Financial��Happiness��and How to Think About Money.

HumbleDollar makes money in four ways: We accept��donations,��run advertisements served up by Google AdSense, sell merchandise and participate in��Amazon‘s Associates Program, an affiliate marketing program. If you click on this site’s Amazon links and purchase books or other items, you don’t pay anything extra, but we make a little money.

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Early and Often

FUNDING A ROTH���and enjoying tax-free growth���may not have been an option for many high-income baby boomers when they were working. But these folks can still get money into a Roth IRA by converting their traditional retirement accounts���and often there���s a great opportunity to do so if they retire early and find themselves in a lower tax bracket.

The first thing to know: Converting from traditional tax-deferred accounts to a Roth IRA will generate ordinary income equal to the taxable sum converted. The second thing to know: Partial conversions are typically the way to go, so you minimize the tax hit in any given year. For instance, instead of converting $100,000 in a single year, you might be better off doing four $25,000 annual conversions, so you stay in a lower tax bracket.

Partial conversions can be a great strategy if you���ve just retired, but income hasn���t yet kicked in from pensions, Social Security and income annuities. Suppose you retired early and plan to delay collecting Social Security until age 70. Soon after, you���ll also need to start taking required minimum distributions. Those RMDs will not only boost your taxable income, but also the money involved can���t be rolled into a Roth IRA. Yes, you can take your RMD and then convert an additional sum to a Roth. But the tax bills will usually be smaller if you do Roth conversions before your 70s, plus that means you start benefiting sooner from the Roth���s tax-free growth.

As you ponder if and when to convert, there are two additional considerations. First, if you want to use retirement account money to purchase longevity insurance���also known as a qualified longevity annuity contract or QLAC���you���re only allowed to use 25% of your IRA balance, with a lifetime maximum of $135,000 as of 2020. Result: Before converting too much to a Roth account, you might want to purchase a QLAC, while your IRA is still large enough to buy the maximum amount.

That brings us to the second consideration. If you convert, the federal government has a potentially nasty trap in store: IRMAA, short for income-related monthly adjustment amounts. IRMAA is essentially a Medicare surcharge that, in 2020, is levied on income above $87,000 if you���re single and above $174,000 if married. If your income exceeds these amounts, you���ll pay a higher Medicare premium. Roth conversions that bump you above these thresholds will trigger the surcharge, even if you exceed the threshold by just $1.

It gets even trickier: The federal government uses a two-year lookback, meaning it assesses your income from two years prior. In other words, Roth conversions done at age 63 will be counted as income and affect Medicare premiums when you turn 65 and file for Medicare. This is another reason to do Roth conversions as early in retirement as possible, because Roth conversions after age 62 could increase your Medicare premiums.

Sound bad? There���s another pitfall to consider if you���re married. If your spouse dies, the $174,000 IRMAA threshold drops to $87,000 the next year, when you���re filing as a widow or widower. That creates an additional incentive to convert traditional retirement accounts to a Roth sooner rather than later.

A final argument for converting in the near future: Tax rates are currently scheduled to rise after 2025. That means converting in 2026 and later years could mean a far bigger tax hit than if you convert today.

James McGlynn CFA, RICP, is chief executive of Next Quarter Century LLC��in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of��Retirement Planning Tips for Baby Boomers. His previous articles include��Don’t Get an F,��Late Fee��and��Where to Begin.

HumbleDollar makes money in four ways: We accept��donations,��run advertisements served up by Google AdSense, sell merchandise and participate in��Amazon‘s Associates Program, an affiliate marketing program. If you click on this site’s Amazon links and purchase books or other items, you don’t pay anything extra, but we make a little money.

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Just Do It

WANT TO TAKE some simple steps to improve your life, as well as that of those around you? Here are 11 things to do today:

Look somebody in the eye and say, ���Thank you so much. I really appreciate it.���
Stop talking about yourself and, instead, ask folks about their life.
Throw out something you���ve been meaning to get rid of.
Read an article by somebody you disagree with���and think hard about whether he or she might be at least partially right.
Stop pretending to family and friends that everything is great. Tell someone about a weakness you struggle with or a problem in your life.
Think about somebody rich or famous. Now ask yourself: Is his or her life as great as you imagine���or is it a mixture of good and bad, just like yours? Arguably, the rich and famous have it worse than the rest of us: They have far more than others and yet they���re almost certainly dissatisfied. But at the same time, they can���t complain, because people will think they���re a bunch of whiners.
Spend five extra minutes exercising.
Donate to a charity.
Get in touch with someone you haven���t spoken to in a while.
Ponder the things you���re looking forward to most in the year ahead.
Take a moment to think about your favorite people and possessions���and be grateful for your good fortune.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook . His most recent articles include Eyes Forward,��Low Blows��and Saving Myself.�� Jonathan’s ��latest books:��From Here to��Financial��Happiness��and How to Think About Money.

HumbleDollar makes money in four ways: We accept��donations,��run advertisements served up by Google AdSense, sell merchandise and participate in��Amazon‘s Associates Program, an affiliate marketing program. If you click on this site’s Amazon links and purchase books or other items, you don’t pay anything extra, but we make a little money.

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Bearing Gifts

GIVING GIFTS delivers significant emotional and health benefits, or so says the research.��But I find much depends on how the actual giving takes place.

My best giving lesson occurred many years ago. At a rural busstop on the island of Crete, off the coast of Greece, I sat next to an old local woman dressed in ragged clothing and torn shoes. Neither of us spoke the other���s language. She carried with her a small bag of fresh peaches and motioned for me to take one. I smiled and declined. But she was persistent, so I assumed she was offering to sell me one. I took out some money. She shook her head ���no.���

Instead, she handed me a huge peach and gestured that I taste it. After biting into the delicious fruit, I let out an appreciative sound and grinned. As we both got on the bus, the old woman���s face unfolded with an amazing smile of pleasure. I was moved by her simple humanity and her willingness to share something she viewed as so special.

But other times, giving feels disingenuous. I think about my former employer. I was assigned to be secret Santa to a co-worker��I disliked. Nothing about the experience was positive. All I remember was that my gift expenditure matched the recommended amount. I���ve had similar negative experiences when purchasing other gifts solely out of obligation.

Even giving to a worthwhile charity can result in different reactions, depending on how we approach it. I feel more connected when I mindfully focus on a charity���s mission and goals. If, in addition to contributing financially, I get involved by volunteering, my commitment grows even more.

But when I view a charitable contribution from a��purely economic perspective, something feels lacking. As a financial advisor, I understand that a close review of how each nonprofit manages its donations is essential to understanding a charity���s effectiveness. I also appreciate that there are tax-planning options to consider, so you receive the biggest tax savings from any particular donation. Still, seeing our contribution only as an economic exchange can diminish our sense of connection to the charity involved.

In other words, while giving may seem like a straightforward activity, it isn���t always uplifting. Here are five lessons based on my experience with giving:

If we���re willing to make a real sacrifice and extend ourselves, it means more.
When we expand our framework from friends and family to the larger world community, something special occurs.
We should focus on who and how our money is helping. This will make the gift more satisfying.
Internally motivated giving provides greater emotional benefits than gifts given under duress or out of a sense of obligation.
An open heart leads to generosity and a meaningful connection with others���as the old Greek woman reminded me.

Rand Spero is president of Street Smart Financial, a fee-only financial planning firm in Lexington, Massachusetts. His previous articles include Admission of Guilt,��Life Support��and��Monthly Affliction. Rand ��has taught personal finance and strategic planning at the Tufts University Osher Institute, Northeastern University’s Graduate School of Management and Massachusetts General Hospital.

Do you enjoy articles by Rand and HumbleDollar’s other contributors? Please support our work with a donation.

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Journey’s End

A FEW MONTHS ago, I received an early morning phone call from a nurse, notifying me that my mother had passed away. Even though she was age 96 and recovering from a mild heart attack, it was still a shock.

Up to the time of her death, she was mentally alert and determined to show everyone that she belonged at home, not at a strange nursing and rehabilitation facility. She gave it her best, but she couldn���t overcome her weak heart.

After spending seven years as my mother���s primary caregiver, I had become very close to her. When she passed away, I was overwhelmed by this strong sense of loneliness. Having family and friends to lean on provided me with much needed support at this difficult time���yet another reminder of how relationships are so valuable in our life���s journey.

Ever since I retired, I���ve been my parents��� caregiver. I now have this big hole in my life I need to fill. I feel like I���m retiring again. Indeed, taking care of a loved one can, at times, seem like a job. It can be stressful, physically demanding and require long hours. Still, I wouldn���t hesitate to do it again.

I���ll be moving next year and that will keep me busy. Rachel and I will be moving into my parents��� house. This move is something they would have wanted.

I have some reservations about the move, because there are financial risks involved. The house needs a lot of work. It could be a money pit, where we blow through our budget if we aren���t careful. It���s the type of project you should undertake when you���re employed and have a steady paycheck���not when you���re retired and living on a fixed income.

The house has an upstairs, which is not ideal for people our age. Although my elderly mother lived there, it won���t be easy to navigate the house in our declining years. Those stairs might require another costly move down the road.

Although this might not be a good financial decision, I believe it���s a good life decision. Our quality of life will improve with this move. How so?

We���ll get excellent health care. We will be near to high-quality doctors and hospitals.
The city we���re moving to is listed as one of the safest places to live in the U.S.
There will be plenty of outdoor activities to participate in, such as trails for walking and riding a bike.
We can stroll to many restaurants and stores in the neighborhood.

I���ll miss my mother very much. She was a person I could always count on for help and advice. I learned that early in my life.

When I was in first grade, there was a little girl who sat next to me in class. When the teacher wasn���t looking, she would whisper in my ear, ���I���m going to marry you, Dennis.��� She would also tell all the children in class that we were going to get married.

One day, when our class was lined up to go into the cafeteria for lunch, she stepped out of the line and, in front of everybody, said, ���Dennis, we are going to get married.���

I went home that afternoon and told my mother about this little girl who was terrorizing me at school. My mother promptly called the school and talked to my teacher.

The next day, I went to school and my desk was moved to the far side of the classroom and the little girl���s desk was on the opposite side. After a few days, I never heard any more comments about getting married.

I knew from that day on how lucky I was to have a mother who I could go to, no matter how big or small my problems were.

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 So Many Benefits,��Peace of Mind��and��Getting Schooled. ��Follow Dennis on Twitter��@DMFrie.

Do you enjoy articles by Dennis and HumbleDollar’s other writers? Please support our work with a�� donation .

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The REIT Stuff?

WHEN BUILDING portfolios, why don���t I include real estate investment trusts?��REITs are large, diversified real estate companies. Some own office buildings, while others own apartments, hotels, shopping centers or other kinds of property. An example is Simon Property Group, which owns more than 200 shopping malls across the country.

A REIT is, on the surface, just like any other company, but with one unique feature: Dividends aren���t optional. REITs are required to pay out virtually all of their income, net of expenses, to shareholders each year. As a result, shareholders can expect a reliable���and relatively large���stream of annual income. Simon, for example, is currently paying a dividend of��nearly 6%. This compares to an average of��less than 2%��for other stocks in the S&P 500. This is one reason REITs have great appeal.

In addition to their reliable dividends, REIT fans cite these benefits:

Real estate is an extremely straightforward business. Tenants pay rent. After expenses are deducted, REIT shareholders receive a share of that rent. In essence, REITs allow you to become a landlord without the hassle of managing properties yourself.
REIT stocks have a lower��correlation��with the overall stock market than other kinds of stocks. This means they offer greater diversification. On a scale from 0 to 1, REIT stocks��� correlation to the S&P 500 is just 0.6. Most other companies’ stocks���such as those in technology, health care and energy���have correlations in the range of 0.8 or 0.9. In an environment where the stock market feels high, additional diversification seems like a good idea.
REITs appear to provide an attractive compromise between bonds and stocks. Like bonds, REITs provide steady income. Like stocks, REITs offer the potential for growth, as their properties appreciate and rents increase. This seems like an ideal combination.

With all these perceived benefits, why don���t I recommend REITs? Keep in mind four points:

1. I actually do like REITs���but I don���t like them any more than any other kind of stock. When you buy an index like the S&P 500, it already includes REITs. I���ll grant that it’s a small portion of the overall market���just 3%���but they are in there. I see no reason to buy more.

2. REITs��� performance has been undistinguished. Over the past 15 years, they���ve done a bit worse than the overall stock market, but with much greater volatility. In 2008-09, when the overall market fell 50% from peak to trough, REITs fell 68%.

3. I appreciate that REITs have lower correlations to the overall market than most other stocks. That makes them somewhat unique. But that is just a��relative��advantage. For true diversification, I turn to bonds, which have traditionally demonstrated��a negative��correlation with stocks. In other words, bonds have gained when stocks have fallen, and vice versa. That is true diversification.

4. Owning a REIT is different from owning your own rental property. Yes, REITs have a scale advantage, but they also have a cost disadvantage. At Simon, for example, Mr. Simon took home $11 million last year. His second in command took home $5 million. When you own a rental property directly, it takes more work, but I also believe the rewards are much greater because you’re not burdened by such expenses.

The bottom line: I see no reason for investors to go out of their way to load up on REITs. Are REITs bad? Hardly. But they’re not special, either. The 3% allocation in the S&P 500 is, in my view, sufficient.

A final point: There are two types of REITs���those that are publicly traded and those that aren���t. In this discussion, I have been referring only to the publicly traded variety. Private, or nontraded, REITs are a different matter. A favorite of brokers because of the high sales commissions they can earn, nontraded REITs have a��terrible��reputation���and I would stay far away from them.

Adam M. Grossman���s previous articles��include Candy Land,��Owning Oddities��and Imagining the Worst . 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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