Jonathan Clements's Blog, page 343

The Aftermath

AFTER LEAVING the hospital, our family met up at a favorite neighborhood restaurant.

���What���s next?��� the teenagers asked.

���Now begins the parade of covered dishes,��� I answered.

For the month after my husband���s death, when preparing food hardly seemed possible, friends and neighbors made sure our refrigerator and freezer bulged. The kids experienced a variety of main meals, side dishes and desserts. There was enough for us and our many helpers, and we experimented with time and labor-saving meal shortcuts. Prepackaged salad, anyone?

We also had support personnel. My sister-in-law was the first to arrive, dispatched ahead of my brother, who would come the following week to assist with the memorial service. For two months, half-a-dozen houseguests took on mundane tasks, each in their own way. The kids experienced myriad household models. By the end of this, a couple of months later, we were ready to be alone.

Questions of what would happen to my spouse���s things���including his bank accounts���began the day he died. One person asked about a charitable contribution he had made annually. Would I be making it again this year, possibly increasing the amount? Since it was January and he made the contribution each December, I replied that I would answer in 10 months. Another person said, ���You have two cars. What will you do with the second car?��� There was absolutely no immediate need to do anything with the second car, and I replied to that effect.

Two matters, however, required immediate handling. First, I needed to decide where to send my husband���s body. Did I want to work with a funeral home or handle matters myself? It���s possible, by arranging a cremation, picking up the ashes yourself and then going somewhere to scatter them, to reduce the cost to a few hundred dollars. At the other end of the spectrum, funerals can be as expensive as destination weddings.

Second, I needed a rough assessment of my financial situation. Did we have access to enough cash and credit to handle immediate expenses? How was I supposed to deal with his financial accounts?

I called a funeral home, as well as the lawyer who���d prepared our wills and other legal documents. A funeral director arranged for his body to be sent to a mortuary. I would meet with her the next day. I also set up an appointment with our lawyer. My sister-in-law accompanied me to both meetings.

I had already been in contact with my employer over the prior week. Bereavement leave is typically three-to-five days of paid leave for a death in the immediate family. Longer paid or unpaid leave is sometimes available, depending on a newly bereaved person���s position and the business demands of his or her workplace. The Family and Medical Leave Act does not cover bereavement, but can cover time off necessitated by your emotional state. Those qualifying can take up to 12 weeks of leave over a 12-month period.

The meeting with the funeral director came first. She laid out the possible choices and the prices for each. I toured the property. I had also considered a venue downtown. But this space seemed better for the service and reception we were planning, plus it offered free and ample parking. Working from an a la carte price list, I could limit expenses to only those items I felt were essential and reasonably priced. We selected a tentative time and date. The funeral director prepared a contract, but I didn���t immediately sign it. I told her I needed to review it and also discuss it with my attorney.

The attorney meeting was straightforward. I thanked him for his thoroughness in preparing our family���s legal documents. I said the advance medical directive had been an immense help at the hospital. I told him I would need his assistance managing the estate and paid him a base amount, which would grow much larger, depending on problems we might encounter. I talked about the proposed contract for the memorial service and asked if the cost appeared reasonable.

I also gave the attorney a rough estimate of our total worth and asked if he agreed it should be enough for the foreseeable future. I told him both of our cars had more than 160,000 miles on them and I felt I should replace one, as I no longer had someone to pick me up if the car broke down. In short, I reviewed the largest financial decisions for the next few weeks and checked my thinking.

I had no false sense of rationality. I knew I was in shock and needed to check my thinking at every turn. After the meeting, I reviewed my notes from the discussion and confirmed with my sister-in-law that I���d correctly stated my questions and fully understood the attorney���s responses.

I went back to the funeral director and signed the contract. Less than a week into my new life, I had spent nearly two months��� take-home pay. Still, we���d found easy ways to save money, and also delayed spending on a gravesite and marker, giving ourselves time to regroup.

As I think back on the immediate aftermath of my husband���s death, six lessons stand out:

You don���t need to prepay funeral expenses, but it helps if you and loved ones discuss costs and options, while you���re young and healthy and it���s all only hypothetical. If you want to be frugal, give your relatives permission in advance for simple disposition of your remains. It���s best to do this in writing.
National cemeteries offer burial plots for military families who meet eligibility requirements. The Department of Veterans Affairs will alternatively provide a headstone for an eligible veteran���s grave in a private cemetery. We belatedly checked and learned my husband didn���t qualify, despite his Vietnam-era service.
You may have a lengthy delay before you can access your spouse���s financial accounts. It takes a while to get a death certificate, for instance. Wills, trusts, death certificates: You will need multiple copies of these important documents.
Immediate expenses are likely to be higher than you expect. In addition to handling the disposition of the remains, writing and placing an obituary, and preparing a funeral, you might find yourself paying for airfares and hotels for one or more family members. Meanwhile, everyday household tasks may not be accomplished in your usual cost-effective way.
Even with family and friends at hand, you might need to hire help during the months that follow. Your partner no longer will be there to do his or her share of the work. Your children may stop doing their chores, and will need extra help dealing with school administrators, teachers and friends. Someone else can clean the house or mow the lawn. A trusted friend can open and sort your mail, and then alert you to anything that���s important and time sensitive.
Very few things require immediate action. Any large expenditure is best delayed until you���re in a better frame of mind, perhaps six or 12 months in the future.

Catherine Horiuchi is an associate professor in the University of San Francisco’s School of Management, where she teaches graduate courses in public policy, public finance and government technology. This is the second article in a series. Catherine’s first article was At the End.

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.

The post The Aftermath appeared first on HumbleDollar.

So Many Benefits

SOCIAL SECURITY has come under political attack over the years. With the federal deficit ballooning, will there be another round of attacks in the run-up to 2020���s election?

I hope not. Here are 15 reasons we should all want to preserve Social Security benefits, no matter which political party we favor:

It helps many. About 63 million people get a Social Security check each month. That���s one out of six Americans.
It provides insurance. Social Security is a wage insurance program designed to help people when they��retire��and in the event of��disability or the death of a family���s breadwinner.
It���s reliable. Three weeks after the 9/11 attack on the World Trade Center, Social Security checks were mailed out as usual. In fact, Social Security has never missed a payment.
Low expenses. Since 1989, Social Security���s administrative expenses have totaled 1% or less of the combined total outflows from the trust funds. That���s less than many private plans.
It forces people to save for retirement. For most folks, participation is required by law. You also can���t withdraw your contributions prematurely, as you can with most private savings plans.
It���s the only retirement plan for many people. Just 27% of those without access to an employer-sponsored savings plan say they have any retirement savings.
Social Security is a steady source of income���one that isn���t subject to financial risk or stock market fluctuations. It���s viewed as one of the three pillars of retirement income, along with employer pension plans and income from personal savings.
Social Security provides a higher annual payout than private retirement annuities. A key reason: Its administrative costs are much lower.
It���s a major source of income for older Americans. According to SSA.gov, ���Social Security benefits represent about 33% of the income of the elderly. Among elderly Social Security beneficiaries, 21% of married couples and about 45% of unmarried persons rely on Social Security for 90% or more of their income.���
Social Security lifts more people above the poverty line than any other program. Kathleen Romig, a senior policy analyst at the Center on Budget and Policy Priorities, writes that, ���Without Social Security, 22.1 million more Americans would be poor, according to analysis using the March 2018 Current Population Survey. Although most of those whom Social Security keeps out of poverty are elderly, 6.7 million are under age 65, including 1.1 million children.���
It protects the most vulnerable. Social Security is especially important for women and people of color. Again, according to Romig, ���Social Security brings 9.1 million elderly women out of poverty. Without Social Security, the poverty rate among elderly Latinos would approach 50%, and the poverty rate among elderly African Americans would exceed 50%.���
It offers inflation protection. Social Security benefits increase along with inflation, so people are less likely to fall into poverty.
It benefits all of us. Frank Stricker, an emeritus professor of history at California State University, Dominguez Hills, says, ���Social Security is a system into which everyone contributes and from which everyone gets something.”
It���s a way of helping each other. Workers and their employers contribute 12.4% of wages, so retirees can get their monthly check.
It promotes equality. It isn���t means-tested. Instead, Social Security treats everyone equally, no matter what their wealth or income.

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 Peace of Mind,��Getting Schooled��and��Battling Time. ��Follow Dennis on Twitter��@DMFrie.

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

The post So Many Benefits appeared first on HumbleDollar.

Few Absolutes

ALMOST 30 YEARS ago, I landed my first fulltime job. I worked at a state-run academic institution, earning $16,000 a year. The sole retirement benefit was a pension plan with a five-year vesting period. There were no investment choices to be made. There was no ability to invest additional funds, beyond what my employer contributed to the plan. It was a retirement plan requiring no participation on my part.

My second job came with the option of investing in a traditional 401(k) plan. I was confronted with having to decide how much of my salary I wanted to contribute. I also had to choose between a large number of investment options. Faced with those choices and having no knowledge of investment principles, I opted not to contribute.

When I began working for my current employer���nearly 22 years ago���I was immediately vested in their retirement program. The only choice I had to make on my first day on the job was how to invest the money that my employer would contribute to the plan. When I saw one of the fund options included the words ���guaranteed return,��� I checked that box.

For years, I didn���t second-guess my investment decisions. My account balances were small and so was my tolerance for risk. I was comfortable knowing my money was growing at a guaranteed, albeit rather slow, pace.

When I hit my mid-40s, things changed. Retirement no longer seemed far away. I got divorced. I realized I needed to learn how best to manage the money I had. I started listening to financial radio shows, reading books about personal finance and scouring the internet for forums with investing advice. It didn���t take long to learn there were as many opinions about the ���right��� and ���wrong��� way to manage investments as there were people offering advice.

All that sage wisdom caused me to question some of the decisions I���d made years ago. Would I have been betting off cashing out my pension when I left my first job and investing the money instead? Should I have maxed out my 401(k) at my second job rather than buying a home? Was the guaranteed return fund I had pumped money into a poor investment choice, given my age?

As I digested all the information, I slowly began making changes. I moved a portion of my money from lower-risk funds into potentially higher-returning options. I increased my savings rate dramatically. I began reading the details of all the plans I was invested in and understanding where I was positioned financially.

Perhaps the most important lesson I learned was that there are no absolutes when it comes to investing. For every person who abhors income annuities or reverse mortgages, there���s another who finds them a useful commodity. For every proponent of taking a lump sum distribution from a pension plan, there���s an advocate for receiving monthly lifetime payouts.

As with most things in life, there���s no ���one size fits all��� solution when it comes to finances. Rather than questioning the decisions I���ve made in the past, I���m beginning to appreciate the things I���ve done right. I started saving at a young age. I���ve maintained a lifestyle that doesn���t exceed my paycheck. I have a work ethic that���s kept me steadily employed for three decades. For me, those are the only absolutes that matter.

Kristine Hayes is a departmental manager at a small, liberal arts college. Her previous articles include Why FI,��Pet Project��and��Educated Consumers. Kristine��enjoys competitive pistol shooting and hanging out with her husband and their three dogs.

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.

The post Few Absolutes appeared first on HumbleDollar.

Owning Oddities

TURN ON THE RADIO and, it seems, you can���t help but hear the holiday classic It’s the Most Wonderful Time of the Year. My question: From an investor���s perspective, is this indeed the most wonderful time of the year?

Apparently, it is. According to a 2017 paper titled Holidays Financial Anomalies, three of the best days for the stock market are the days after Thanksgiving, Christmas and New Year���s. And Dec. 30? Statistically, that���s the single best day of the year for stocks.

But where does this leave us? Yes, this ���holiday effect��� is clearly supported by the data, but what can we do with it? Does it represent some secret road to riches? To answer this question, it���s useful to look at the holiday effect in context. This is an example of what academics call an ���anomaly������a way to beat the market that persists and yet often we don���t fully understand why.

It isn’t the only one. Research has found dozens of them. There’s the value effect���that cheap stocks tend to outperform expensive ones. There’s the size effect���that small company stocks tend to outperform large ones. There’s the momentum effect���that a stock’s performance tends to carry over from day to day. Collectively, these effects are known as investment ���factors.���

Is it worthwhile incorporating factors into your investment strategy? In general, yes, but here are five things to keep in mind:

1. Diversify your factor bets.��Every factor has its season and will shine at certain times or in certain environments���but there���s no factor that outperforms��all of the time. For that reason, if you���re incorporating factors into your portfolio, keep each one to a modest size. In addition, you might want to incorporate more than one. In the portfolios that I build, for instance, I include allocations to both small-company and value stocks.

2. Choose factors that are practical to implement.��While the holiday effect is interesting, you���d have a hard time implementing it. The outperformance on the market���s best days is just fractions of a percent. It’s hardly enough to support an investment strategy, especially after figuring in trading costs. You’d have to buy stocks before each of those days, hold them for just one day and then sell them.

My advice: If you want to incorporate factors into your portfolio, look beyond idiosyncrasies like the holiday effect and instead choose factors that can be implemented more easily. A value stock strategy, for example, typically buys stocks and holds them for at least a year before selling.

3. Keep your eye on fees and taxes.��One of the downsides of factor investing is that it takes some work, which means that factor funds are more expensive than simple index funds. At Vanguard, for example, its��factor funds��are at least four times more expensive than its basic��S&P 500 fund. Also, factor funds buy and sell stocks much more frequently, which could leave you with a bigger tax bill. Bottom line: If you want to incorporate factors into your portfolio, be sure you don���t pay so much that it offsets any potential benefit.

4. Beware of shiny objects.��A few years back, famed fund manager Bill Miller announced a new fund called Seismic Value Partners. His goal: to apply earthquake prediction techniques to stock-picking. It sounded odd, and I don���t believe the fund made much headway, but Wall Street continues to cook up new things like this. Last month, for instance, a Morningstar researcher��highlighted��a new fund that would incorporate a ���New Age alpha proprietary human factor score��� into its investment algorithm.

My recommendation: Before investing in any factor, you want to see two things. First, look for a long-term track record. Second, and just as important, the strategy needs to make logical sense. The small-company stock effect, for example, is easy to understand: Small companies are able to grow more quickly, on a percentage basis, than larger firms, so it makes sense that these stocks might perform better.

5. Remain vigilant.��Investment historian Jamie Catherwood��tells the story��of an early factor investor, a Japanese trader named Yomiji Sumiya. In the 18th century, Yomiji devised an elaborate system of messengers, telescopes and hand signals to transmit prices between rice exchanges more quickly than others. Yomiji made a fortune, until the day one of his messengers got distracted by a friend. After stopping for several glasses of sake, the messenger mixed up his signals.

The lesson: Factors may have a limited shelf life, so be vigilant. In most cases, I recommend a buy-and-hold approach to investing. But when it comes to factors, you need to be more willing to make changes. At the same time, keep in mind point No. 1: Factors can, and do, underperform for extended periods, so don���t jump ship at the first sign of lagging returns. Instead, only abandon a strategy when the logic underlying a factor has fundamentally changed.

Adam M. Grossman���s previous articles��include Imagining the Worst,��The Unwanted Payday��and��No Comparison . 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 .

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.

The post Owning Oddities appeared first on HumbleDollar.

Saving Myself

WHAT DOES IT take to succeed financially? Pundits love to parse stock market returns, dig into the minutiae of Roth conversions and debate retirement withdrawal strategies. Yet, when asked what���s the most important financial virtue, almost all give the same answer: great savings habits.

That mundane reason certainly explains my financial success. Yes, I���ve benefited from owning index funds, holding a stock-heavy portfolio and buying enthusiastically during market declines. But all of that has been gravy. Instead, what���s done the trick is earning a steady income and keeping my living costs low���and taking the difference between those two and socking it away for the future.

Reaping windfalls. When I moved to New York from London in August 1986, I was a year out of college with no savings, $1,000 in credit card debt and a fianc��e who was a graduate student. My starting salary as a reporter (a.k.a. fact-checker) at Forbes magazine was $20,000 a year. Needless to say, there wasn���t much left over once rent, commuting costs, food and other necessities were paid for.

But every so often, windfalls would arrive in the mail���a health-insurance reimbursement check, a tax refund, money from a freelance article I���d written. Unlike my paycheck, this money wasn���t already spoken for. I would immediately deposit these checks and then mail off an offsetting check to one of my investment accounts. I can still recall the pleasure of reviewing the resulting account statement, with its modestly bigger balance.

Later, the windfalls got much larger. I penned three books that garnered sizable advances, which I was able to save, because I wrote all three books while holding down my day job. Similarly, my six years at Citigroup meant six year-end bonuses, though those were icing on the cake, because by then I was already comfortably on track for retirement.

Cheap digs. In late 1992, my first wife and I bought a home���and it was, in one sense, a mistake. At $165,000, it was less than we could afford, and yet we worried about paying more. The three-bedroom, one-bath colonial was located on a busy street, and badly maintained, to boot.

I lived in that house for almost two decades. After some expensive renovations, it was no longer a badly maintained three-bedroom, one-bath colonial. But it was still on a busy street and it was never a house I loved. Nonetheless, because the mortgage payments and property taxes were so low, I was able to save prodigious amounts. Indeed, the gap between my housing costs and my paycheck grew ever larger in the decades that followed, thanks to frequent pay raises.

Since then, I���ve owned a couple of apartments that I have loved. Still, living for two decades in that $165,000 house was, I suspect, the biggest contributor to my nest egg���s growth.

Out of hock. Soon after we closed on the house, a mortgage statement arrived in the mail, with a payment coupon for the next month. There was a line to include an additional principal payment. I added $10.

Every month thereafter, I���d add extra to the mortgage check, with the sum growing ever larger. I rationalized that paying down my 7%-plus mortgage offered a better after-tax yield than any bond I could buy���and, indeed, at the time I owned little or no bonds in my portfolio. I finished paying off the mortgage a dozen years later. Like the modest windfalls I saved every time they arrived in the mail, adding extra principal to each mortgage check was another example of a small step���taken consistently���that snowballed into a huge financial win.

Hard road. Housing is the typical American family���s biggest expense, accounting for a third of their spending. No. 2 on the list: cars, which devour 16% of spending.

I���ve never cared much about the car I drive. Admittedly, for 13 years, I owned a Lexus SC300���but I bought it secondhand and drove it until electrical problems made starting it a daily dice roll. In fact, almost every car I���ve owned has had a previous owner and often multiple previous owners. It���s been a big money saver over the years.

No interruptions. I���ll take credit for my good savings habits. But I���ve also been lucky. I���ve never been laid off or had a long period of unemployment���though I would have been fired from my first job out of college, if I hadn���t made it clear that I was planning to leave anyway.

That job was as a reporter-researcher at Euromoney magazine in London. The editor, Neil Osborn, could barely disguise his disdain for me. For years, I hung onto the draft of one of my articles, across the top of which he had scrawled, ���This is shit.��� His summation of my talents, delivered when I told him I was leaving: ���You seem smart enough. Maybe you could be an analyst. But you can���t write to save your life.���

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook .��His most recent articles include Breaking Bad,��Bullheaded��and��Count the Cash . 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.

The post Saving Myself appeared first on HumbleDollar.

Tending the Garden

WE HAVE a hardwired biological incentive to promote the wellbeing of our kids, so that the family line will continue. This is the selfish gene in action. Yet modern human behavior suggests that the wiring may be at least a little faulty���for three key reasons.

Environmental. Our domination of natural resources continues to create tremendous improvements in global wealth, but it sometimes comes at the expense of the only confirmed habitable space that���s practical for our species.

To some extent, this is unavoidable. Even the most ardent and noisy environmentalists I know aren���t advocating a return to the days before cheap energy and the attendant conditions, when people were rid of their teeth by age 25 and worked to death 10 years later. Still, we are the only stewards of our lonely planet, and it���s a delicate balancing act. Environmental sustainability must be achieved for our children to succeed and prosper.

Cultural. Over the past 400 years, Western thought and culture have laid a foundation for the incomprehensible quality of life we enjoy today. Our shared values have allowed individual freedom and wealth to flourish. A brief look at world history in the 20th century will show that when wealth inequality is eliminated, misery is universal���but when wealth inequality is unchecked, the pillars that support civil society can become very unstable. Either outcome is catastrophic to peace and prosperity. We must tend the cultural roots that sustain our quality of life.

Financial. It has been said that wealth carries the seeds of its own destruction. Thomas Stanley and William Danko wrote about what they called ���economic outpatient care��� in their classic The Millionaire Next Door. They noted that adult children receiving parental financial support often lacked the knowledge and motivation that enabled their parents to succeed and prosper. If we���re too generous in helping our children���s financial wellbeing, there���s a grave risk our efforts will backfire.

Which begs the question, ���What should we leave to our kids?��� There are four items on my growing list:

Teach your children self-reliance. As a parent, sometimes the easiest thing to do is give your children what they need. This may be appropriate in some cases, particularly when they���re young. But for them to grow past bottles and diapers, parents must allow their children to explore and gain experience from bad judgment. Their struggle may be hard to watch, but it���s necessary for the learning and growth of any healthy person.
Teach your children gratitude. It���s easy to take running water, the ever-present electrical grid and modern medicine for granted. This is especially true for those of us who have never known a world without these things. But these things exist due to the great effort and sacrifice of many people, past and present. If your kids think they live in a world of grievance and oppression, a few weeks in Haiti should do the trick.
Teach your children joy. How many times have you seen entire families sitting together in a public space, well-dressed in the midst of abundance, each person very alone with their mobile device? This is a relatively new phenomenon and we are just beginning to learn the desperate psychological effects of our disconnectedness. With a little help, children can learn early on to find joy in the natural world, in connection with others and in doing hard things.
Teach your children generosity. We all need to be reminded of our responsibility to create a brighter future. We don���t exist to demand rights, happiness or self-esteem. Your children can learn to bring meaning to their lives by seeking and accepting this responsibility���and by investing in the lives of others.

If our kids are properly grounded, any assets we leave them can be a blessing. But that grounding���financial and otherwise���is unlikely to happen by accident.

When not paddling, biking or shooting, Phil Dawson provides technical services for a global auto manufacturer. He, his sweetheart Donna and their four extraordinary daughters live in and around Jarrettsville, Maryland.��His previous articles include When Brokers Fail,��Financially Fit��and��Fighting for Peace .��You can contact Phil via LinkedIn .

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.

The post Tending the Garden appeared first on HumbleDollar.

Bonding With Bonds

FOR MANY YEARS, I didn���t own bonds or anything similar, except some bank certificates of deposit. Frankly, I was clueless.

My first dilemma: Should I invest in bonds if I have a mortgage? It didn���t make sense to me to borrow from the bank and, at the same time, lend out my money at a lower interest rate to a bond issuer. I felt I should pay off my mortgage first. A few friends and even a financial advisor recommended otherwise. Their objections notwithstanding, I followed my intuition. I was relieved to find out later that my view wasn���t so na��ve after all.

Fast forward a few years and I had the mortgage paid off. A magical side effect: My entire paycheck no longer disappeared. For the first time in my career, I realized I could take a long break from work if I had to. This feeling of freedom planted the idea of early retirement in my head. I probed my financial readiness and realized that bonds would now play a vital role.

For the next few months, I researched��bonds, including different kinds, the risks, credit ratings, taxation, liquidity and so on. Alas, I was left with more questions than answers. What percentage should I allocate to bonds? Individual bonds or bond��funds? Is credit risk real? Should I worry about duration or convexity? What about inflation? Tax-exempt or taxable? Government or corporate?

Overwhelmed and confused, I needed a simpler approach, so I started over, but this time with a basic question in mind: What are the big problems with my retirement finances and can bonds solve them? This gave me much needed clarity.

My financial situation posed two challenges. First, my modest nest egg needed a high stock allocation to survive a longer-than-average retirement, and yet I also needed bonds to diversify. Second, being more than a decade from tapping Social Security, I needed to withdraw large amounts in my initial retirement years. On top of this, I couldn���t even touch my retirement accounts for another few years. True, my frugality was an advantage. Still, I needed a secure and predictable cash flow to cover at least the bare minimum expenses until other income sources were available.

To simplify construction and maintenance of my portfolio, I set a few guidelines. The bond portion of my portfolio would include only high-grade issues with little default risk. I treated CDs and cash equivalents as part of my bond allocation. I didn���t worry about inflation, because my overall portfolio had other components to handle it. Chasing yield���especially at the expense of credit quality or liquidity���wasn���t a goal.

My first goal���a better balance between stocks and bonds���was easy to address. I needed a high-quality, liquid bond fund to add to my long-term investment portfolio and complement my stocks. There were plenty of low-cost core bond funds to choose from. Some owned only Treasurys and some had a mix of government and top-rated nongovernment issues. I narrowed my choice to intermediate-term funds, since they offered a good tradeoff between yield and vulnerability to rising interest rates, which would drive bond prices lower. Meanwhile, the liquidity of a fund, coupled with the freedom to make commission-free transactions, would allow me to rebalance my stock allocation as needed.

With my long-term investment portfolio straightened out, it was time to deal with my second goal: predictable cash flow for the next decade or so. This was trickier to achieve. Given my nest egg���s size, the best I could do was use bonds and bond-like investments to cover all expenses for the next year or so, cover essential expenses for a few years beyond that, and only the bare minimum���things like taxes, insurance, property upkeep and so on���for the remaining time. I would then look to replenish this part of my portfolio by occasionally selling stocks from my long-term investment portfolio.

What if stocks performed poorly year after year? With the amount I���d allocated to the core bond fund held within my long-term investment portfolio, I felt I would still be able to hang tough without losing sleep over making ends meet. The alternative was to forget financial independence for now and focus on saving more. I chose financial independence.

The short-term cash reserve to cover upcoming spending was taken care of through online high-yield bank money-market accounts, plus individual Treasury notes and bills. My brokerage firm had a convenient tool to buy Treasurys at auction and then roll the proceeds from maturing issues into new issues. The money-market account plus Treasurys provided more yield than simply owning a money-market fund or a short-term Treasury fund.

For my mid- and long-term cash flow, I set up a ladder of investments maturing every year up to the year I���d start Social Security. With a ladder, I didn���t have to worry about interest rates rising or figuring out the best time to sell. Instead, I needed to focus only on credit quality and earning a reasonable yield.

Target-maturity bond funds looked promising. They offered both issuer diversification and timely return of principal. But I wanted better credit quality. I decided to go for individual noncallable bonds from financially strong companies. I stuck to only the upper-half of the investment grade spectrum. It was tedious and time-consuming to pick each issue, but it was worth the effort. Overall, I ended up with a well-diversified portfolio that included one large bond fund for rebalancing, several individual Treasurys, some high-grade corporate bonds, some long-maturity bank CDs���and greater confidence about my early retirement.

A software engineer by profession, Sanjib Saha is transitioning to early retirement. His previous articles include Measuring Up,��It’ll Cost You��and��Mind the Trap.��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.

The post Bonding With Bonds appeared first on HumbleDollar.

Give Until It Hurts

I���M GUESSING our credit cards are excited. It���s the holidays, so they���ll get to see the light of day more often. December is a time for spending, for throwing caution to the wind, for rationalizing what we and our children need or deserve. It doesn���t help that we���re barraged with advertising tugging at our heart strings.

Perhaps it���s time to counterattack, to apply logic and to think not about the joys of Christmas morning presents or the next Chanukah gift, but about January and February���s credit card statements. It isn���t going to be easy. Santa driving down a snowy road in a red Mercedes is pretty appealing, especially when they���re promoting what appears to be an affordable lease.

Need an antidote? You might check out two of my favorite holiday movies. In A Christmas Story, Ralphie���s family���s focus on traditions and a few simple gifts���even the unwanted ones���brings back childhood memories, including the fact that I never did get a Red Ryder rifle. Meanwhile, Charles Dickens���s A Christmas Carol reminds us of what���s really important.

Surveys vary and may understate total spending, but it appears each adult will spend��more than $900 on gifts alone, up sharply since the 2008-09 recession. Holiday sales for 2019 are predicted to increase by 3.8% to 4.2% from 2018���s level.

About to join the crowd? Before rushing off to the mall or logging on to Amazon, here are 11 thoughts worthy of the Grinch:

What gift did you receive last holiday season that you remember, actually use and know where to locate?
How many of the gifts that you gave or received last year were returned or exchanged?
Look around your house at the accumulated toys. Do the kids need more stuff? When they aren���t asking to use your smartphone, do they play with what they already have?
Check your credit card statements from last winter. Are they still scary? Are the balances paid off? How much of holiday spending was interest payments?
What is this year���s advertised ���must have��� toy? Be prepared to tell the kids ���no.���
Look at your lawn. Does the holiday spirit require a large $200 inflatable Santa riding in a helicopter? How about making your own decorations? Be warned: Stringing popcorn isn’t easy.
If your list of presents includes cash or a gift card, are you really in the holiday spirit?
If you���ve been married or in a relationship for several years, how about giving up the gifts and instead spending the money on an experience you���ll both enjoy, preferably one you don���t have to carry for months on a credit card? One year, my wife and I went to Sturbridge Village, Massachusetts, and participated in cooking and eating a Christmas dinner using an 1830s menu, tools and traditions. We���re talking whipping cream with tree twigs.
If there���s something the kids want and you think they should have, but you can���t afford it right now, explain that to them. Tell them you���re saving up and will buy the present as soon as you can���and, of course, make sure you keep your promise. With any luck, it���ll eventually make a great gift���and perhaps a good life lesson, too.
If you���re a grandparent, buy a modest present and make a contribution to a college fund. My wife and I do that for Christmas and birthdays. We place a note in the card showing the contribution we made. One grandson recently said he didn���t want any more ���coupons��� for his birthday. Tough luck, Danny, that���s what you���re getting.
Make a New Year���s resolution to sleep in on Black Friday next year. Saving money on things you don���t need, or that you have to charge to a credit card, isn���t saving money.

When I was growing up, under our Christmas tree each year was a 1920 Lionel train engine���just the engine. That was all my father had left from his childhood. Shortly before Christmas one year, my mother sold the engine to a collector. I learned of the sale by accident.

My wife, knowing I was devastated, convinced the buyer to sell it to her for the price he paid. I purchased an old transformer, a few pieces of track and three 1920 railroad cars to accompany the engine. That Christmas, when my parents came for dinner, the train was running under our tree. My mother stared in silence. My dad cried. After 60 years, he played with his train again and, thereafter, did so for a few minutes each Christmas until he died. Now my grandchildren and I do the same.

Despite my curmudgeonly tone, I always look forward to the holidays. But 76 years as a child, parent, grandparent and old man have taught me many lessons about what���s truly important���and one of those lessons is that it takes thought, not money, to buy gifts that are truly appreciated.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include Fashion Statement,��You’re on Your Own��and��What’s Your Plan.��Follow Dick on Twitter��@QuinnsComments.

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.

The post Give Until It Hurts appeared first on HumbleDollar.

Making the Call

TRADITIONAL or Roth retirement accounts? Below are eight key questions to ask. Your decision should be based on your answers to these eight questions���including the importance you put on each.

Do you need a tax break now? Assuming you qualify, a traditional IRA allows you to deduct your contributions, resulting in a lower taxable income for the year. Ditto for tax-deductible contributions to an employer���s 401(k) or 403(b) plan. But with Roth accounts, you don���t get this tax benefit. Rather, you pay taxes on your contributions���but, in return for losing that tax break, you don���t pay taxes when you take out the account���s earnings in retirement.
Do you have money to pay the taxes owed on today���s earned income? If you choose the Roth, you���ll have to pay income taxes on the income used to fund your retirement plans. If you don���t have the money to pay those taxes, you would choose a tax-deductible account.
Might you need your money back before retirement? With a traditional, tax-deductible IRA or 401(k), you must pay income taxes and a 10% penalty if you make a withdrawal before retirement. But if you choose a Roth IRA and need money, you can withdraw your original contributions at any time, with no taxes or penalties owed.
Do you expect your tax rate to rise in retirement? If your tax rate is likely to climb, you would go with the Roth. If you expect your tax rate to be lower, you would favor traditional accounts.
Do you want more after-tax money for retirement? With a Roth account, you���re saving more for retirement, because $100 coming out of a Roth will be tax-free, while $100 coming out of a traditional retirement account will trigger a tax bill���except in the unlikely scenario where your income is so low that you don���t owe taxes.
Do you want to reduce required minimum distributions, or RMDs? These are distributions required by law on almost all retirement accounts beginning at age 70��. RMDs are required per person, not per couple. Each year, you must add up all your tax-deferred account savings���traditional IRA, 401(k), 403(b), SEP IRA and so on���and divide that amount by an IRS table that���s based on life expectancy. The result is the amount you must take out of your tax-deferred accounts in the next year. Failure to do so results in a 50% penalty that���s levied on the RMD amount you failed to withdraw. Want to avoid RMDs? Get money into Roth IRAs. Be warned: Money in a Roth 401(k) or Roth 403(b) is subject to RMDs���a reason to roll this money into a Roth IRA when you leave your employer and retire.
Do you want to bequeath this money to your heirs, without triggering tax problems? Leaving traditional retirement accounts to heirs is more challenging, because income taxes are still owed. If you want to minimize tax problems for your heirs, choose Roth accounts.
Do you want to better manage your tax rate during retirement? Think of your financial accounts in three buckets. There are tax-now accounts, such as mutual funds and individual stocks held in regular taxable accounts. There are tax-deferred accounts, like a traditional IRA, 401(k), SEP IRA and so on. And then there are tax-never accounts, including the Roth 401(k), Roth 403(b) and Roth IRA.

Ideally, you should aim to have a mixture of all three, so you can more easily target a particular tax rate once you retire. Each year, first take money out of your tax-deferred and tax-now accounts up to your targeted tax rate. Need additional funds? You might then turn to your Roth accounts, which are never taxed.

Bryan Sudweeks is an associate teaching professor at Brigham Young University���s Marriott School of Business and a Chartered Financial Analyst. He teaches personal finance and asset management, as well as advising the student-run investment fund. A California native, follow Bryan at the BYU Personal Finance��website.

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

The post Making the Call appeared first on HumbleDollar.

November’s Hits

BEEN DISTRACTED by Thanksgiving? Maybe it’s time to catch up on your reading���by checking out last month’s seven most popular articles:

Are you on Medicare and own a Medigap policy? James McGlynn argues that Plan G is the way to go���assuming you can qualify.
“There���s no need to think about my money because, according to Carl, I���m not going to run out,” writes Dennis Friedman.��“For the first time in my life, I realize I���m financially secure.”
Approaching age 65, when you’ll be eligible for Medicare? James McGlynn explains how to avoid both permanently higher Medicare premiums and a little-known penalty for funding a health savings account.
“Our careful and frugal life together was over,” writes Catherine Horiuchi, recounting her husband’s sudden death���and the five lessons she learned.
American pilot Jerry Kelly died over Germany in 1944. He left behind 220 letters���and those letters offer seven invaluable life lessons, says his great-nephew Ryan Kelly.
“Don’t measure yourself against your neighbors or your friends, because what you see is just part of the story���and that part may be awfully deceptive,” says Adam Grossman.
Hoping to bequeath money to your children or charity? Adam Grossman offers some tips���so you do more good than harm.

Meanwhile, November’s most popular newsletters were Cash Back and Signal Failure.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook .��His most recent articles include Breaking Bad, Bullheaded��and��Count the Cash . 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.

The post November’s Hits appeared first on HumbleDollar.