Jonathan Clements's Blog, page 357

Take It or Leave It

THE CLASH, the U.K. punk-rock group, famously asked, ���Should I stay or should I go?��� Retirees and job changers need to tackle the same question when they leave their employer.

At that juncture, you have four options for your 401(k) or 403(b) account: You can leave the balance in your old employer���s plan, roll over the balance to a new employer���s plan, roll over the balance to an IRA or close out the account.

You can generally keep your retirement savings in your old employer���s plan, even if terminated, provided you have a balance of $5,000 or more. When you leave employment, you���ll likely have to pay back any outstanding loan balances and, if not fully vested, surrender some or all of the matching funds.

Will you lose part of the employer���s matching contribution? My advice: Carefully check the plan���s prospectus before assuming the entire account balance will be yours. The prospectuses for many large company plans are posted on the web, while most smaller companies outsource their plan���s administration. If in doubt about account balances or policy, check with your human resources department or plan administrator. There could be the chance for easy money: You may find that more of the employer���s match will vest if you simply delay your departure by a week or two.

You may want to leave your money with the old employer if the plan has low costs and broad investment choices. That might include institutionally priced funds that you couldn���t access on your own or a stable value fund offering higher-than-market interest rates. On the other hand, if the plan has high fees and mediocre investment options, run for the exits.

What about retirees? Again, it depends on the quality of the plan. Many retirees of my former employer stay with the company���s well-managed and low-cost plan for decades.

If your former employer���s plan is administered by a financial services company, often the financial company will be anxious to retain your account. Indeed, my wife has hung onto two old 401(k) accounts for 18 and 28 years. Both are administered by financial companies.

After she left those two jobs, both employers offered buyouts of their modest pension plans. My wife rolled the payouts into her 401(k) accounts, where the pension assets have been compounding ever since. The money feels safer invested with a financial services firm than as the pension obligations of smaller companies.

While employees can transfer 401(k) assets from an old employer to a new employer, this may not be a top choice, unless the new employer���s plan is exceptionally good. If you want to compare plans, BrightScope provides details and ratings for thousands of employer plans, and highlights those plans that provide better options.

The good news is, 401(k) and 403(b) accounts can be readily rolled over into an IRA at any financial firm. When my daughter was laid off because her employer exited one of its businesses, she simply transferred her 401(k) balance to an IRA with a low-fee financial services firm. She now has more control of her assets. She also has far more investment choices, including a full-range of target-date funds and access to low-cost index funds, plus added flexibility when rebalancing. In addition, she���s now diversified across institutions, because she has her rollover IRA, her 401(k) at her new employer and a Roth IRA invested elsewhere.

One wrinkle to keep in mind: If you want to take advantage of the so-called backdoor Roth by funding a nondeductible IRA and then converting it to a Roth, you���ll want to keep the 401(k) money at your old employer or roll it into your new employer���s plan. If you move the money into an IRA, it���ll cause those backdoor Roth conversions to trigger much larger tax bills. You can learn more about this in HumbleDollar���s money guide.

The final option is to close out the former employer���s account and take a distribution. This surrenders the tax deferral, creates an immediate tax obligation and, if you���re under age 59��, usually triggers a 10% tax penalty. Those are all bad outcomes���all of which you���ll want to avoid.

John Yeigh is an engineer with an MBA in finance. He retired in 2017 after 40 years in the oil industry, where he helped negotiate financial details for multi-billion-dollar international projects. ��His previous articles include Got You Covered,��Nothing to Chance��and��Hers, His and Ours.

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Fact vs. Fantasy

FRAUD WEARS many faces. But depending on who you believe, potentially the most unusual is that of Jeanne Louise Calment. For years, the French-born Calment, who claimed to have been born in 1875, was celebrated as the world���s oldest person. By the time she died in 1997, she would have been 122��� if she’d been telling the truth.��New research, however, casts doubt on Calment���s claim.��

The real story, it turns out, may be that Calment actually died many decades earlier���in the 1930s. Her daughter, Yvonne, then allegedly faked her own death and simultaneously assumed her mother’s identity to avoid inheritance taxes. The Calments were wealthy landowners and inheritance taxes at that time in France were quite steep.

It’s an odd story and we may never know the truth. But it serves as a reminder that there���s often more to a story than meets the eye���and that includes financial stories. Here are three tips to help avoid money missteps:

1. Be skeptical.��When it comes to financial fraudsters, there are often red flags. But because these fraudsters offer the prospect of huge profits, investors often ignore the warning signs.

Take Bernard Madoff. Many in the financial community were skeptical of his track record.��One individual��even presented evidence to the SEC, proving that Madoff had to be lying about his investment strategy, because it was mathematically impossible. But you didn���t even need to understand the math to be suspicious of someone who claimed steady profits, month after month, year after year, without ever incurring any losses.

The lesson: If it seems too good to be true, it probably is. When someone claims to be 122 years old but looks decades younger, you should trust your eyes, rather than someone else���s fantastical claims.

2. Verify.��In the early days of the Internet, there was a��famous cartoon��in which a dog is sitting at a desk, typing on a computer. He says to a dog by his side, ���On the Internet, nobody knows you���re a dog.��� That was more than 20 years ago.

Today, it���s even harder to know who���s behind the information you read online, especially with ubiquitous ���share��� buttons that facilitate the spread of information. This isn���t limited to intentional misinformation. Today, anyone with a computer and a website can publish information online. While this has many benefits, it also means that the valuable roles of editor and fact checker are no longer part of the process. For that reason, it���s more important than ever to double check information you read before using it to make financial decisions.

3. Avoid comparisons.��It can be awfully hard to avoid comparing ourselves to friends, neighbors or peers. When I was in my 20s, I remember a friend asking me why I was still living in an apartment and hadn���t yet purchased a ���big boy house,” as he called it. It was an insulting question at the time, but also revealing. The reality: People judge other people based on simplistic, outward appearances���what type of car folks drive or the size of their house.

And yet, as��research��has shown, there���s little correlation between these outward appearances and someone���s actual financial health. In fact, there is sometimes a negative correlation. Your friend driving that new Mercedes might indeed be a multi-millionaire���or he might just be playing a part in his own fabricated story.

Adam M. Grossman���s previous articles��include Out of Stock,��Say No to Mo��and��Playing Nice . 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 three ways: We accept��donations,��run advertisements served up by Google AdSense 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 merchandise, you don’t pay anything extra, but we make a little money.

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Balancing Act

STOCKS MARCH ever higher, portfolios get ever fatter and yet the conundrum facing investors remains the same. We have no idea what will happen next to share prices���and no reliable way of figuring it out. Consider:

Valuations are rich, but they have been for much of the past three decades. Indeed, if above-average valuations were your signal to sell, you likely would have dumped stocks long ago and missed out on substantial gains. The reality: Valuations��don���t predict short-term returns, though they have some bearing on 10-year results.
Just because a market has gone up doesn���t mean it won���t keep going up. Yes, it feels like we���ve had a nonstop 10-year bull market. But there���s been a slew of intervening dips���including a 19.4% drop in 2011 and a 19.8% plunge last fall���so maybe we shouldn���t be especially bothered by the current bull market���s length.
Bonds and cash investments offer skimpy yields, so arguably stocks remain the most attractive asset class, despite their rich valuations. Moreover, while U.S. stocks look pricey, foreign shares seem far more reasonably priced.

That said, it feels like there���s a limit to how much better the news can get. The 10-year Treasury note is barely above 2%. How much further can yields fall���and hence how much more of a lift can they give to share prices? The corporate tax rate was just cut, giving a onetime boost to company profits. It���s unlikely we���ll get another big corporate tax cut any time soon. Meanwhile, corporate profits are at 9.2% of GDP, versus a 50-year average of 7%. Can we really expect profit margins to widen further?

Where does all this leave us? If you���re under age 45, I���d just keep shoveling money into the stock market, both here and abroad. Even if you have a substantial sum in stocks, you���ll likely save as much���if not more���over the next 20 years. Any decline in share prices could ultimately rebound to your benefit, as you buy at lower prices.

But if you���re older, let me put in a plug for an idea that might be dubbed ���over rebalancing��� or ���goal rebalancing.��� This harks back to an idea I���ve discussed before���and which I purloined from friend and fellow author Bill Bernstein. As Bill says, ���When you���ve won the game, stop playing with money you really need.���

The notion: If you���re comfortably on track to meet your retirement goal, maybe you should dial back the amount of risk you���re taking, so there���s less chance your financial future will unravel because of horrible markets.

To get a handle on the topic, all you need is a relatively simple financial calculator. Suppose you���re age 50, you have $375,000 socked away for retirement and you plan to save $15,000 a year over the next 15 years. Your goal is to retire at age 65 with a $750,000 nest egg, which should be enough to generate $30,000 in annual retirement income, assuming a 4% withdrawal rate. This would be on top of Social Security and any pension income. To calculate your target nest egg, simply multiply your desired annual retirement portfolio income by 25.

We���ll ignore inflation and do the calculation in today���s dollars. There will, of course, be inflation in the years ahead���and, to compensate, you���ll need to step up the sum you save each year with inflation. Let���s also assume you have 75% in stocks and 25% in bonds, which you figure will give you a blended real rate of return averaging 3.25% a year���with the stocks clocking a 4% real annual return and bonds notching 1%. Remember, these are after-inflation rates of return: If we get 2% annual inflation in the years ahead, you���ll need a nominal return above 5% to make the numbers work.

Result? At age 65, assuming that 3.25% real return, you���d have $890,000 in today���s dollars, comfortably above the $750,000 you were hoping for. What if you dropped your target real rate of return to 2.5%, which is what you might earn if you had your portfolio 50% in stocks earning 4% and 50% in bonds earning 1%? You���d still reach age 65 with $812,000, more than your $750,000 target.

So should you over-rebalance? I think it���s a matter, in part, of individual temperament. Do you want to lock in your financial future���or continue taking risk in the hope of an even more comfortable retirement?

I also think you need to consider your personal margin for error. What do I mean by that? If a big market drop would put your retirement at risk���and you fear you couldn���t compensate by working longer, saving more or spending less in retirement���I���d be more inclined to declare the game won and favor a less risky portfolio.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook .��His most recent articles include A Penny Saved,��Tax Rate Debate��and��That’s Enough . Jonathan’s ��latest books:��From Here to��Financial��Happiness��and How to Think About Money.

HumbleDollar makes money in three ways: We accept��donations,��run advertisements served up by Google AdSense 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 merchandise, you don’t pay anything extra, but we make a little money.

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Pay to Play

OUR WEALTH is usually measured by net worth, which is total assets minus all debt. But there���s an alternative measure���which is to assign our wealth to the purposes it serves. What purposes? Two come to mind: physical and social.

Let���s start with physical wealth. We���re talking here about a family���s ability to maintain basic physical comforts, such as enjoying decent food, a comfortable home, a reliable car and access to good health care.

You don���t have to be rich to afford these. Typically, a lower-middle-class income is sufficient. How do you measure your physical wealth? Think about how long you could maintain these comforts without working. During your working career, it might be a matter of months or years. If you���re retired, it will���fingers crossed���be the rest of your life.

Meanwhile, social wealth relates to mental pleasures. It���s about ego and entertainment. It���s about our purchasing power relative to the rest of society���a zero-sum game. Social wealth is often shown off via status symbols. We humans are competitive creatures who enjoy recognition. After all, is an adult driving a luxury car much different from teenagers flexing their muscles on the beach?

Unlike physical wealth, social wealth can be expensive, requiring a six- or seven-figure income to purchase McMansions, luxury cars, exotic trips and so on. For a new retiree, it may require a net worth of more than $2 million.

Differentiating physical from social wealth can affect our decisions on current spending. Along with funding basic physical needs, we all indulge in ���social spending,��� whether we can afford it or not. How can we tell if we���re engaging in heavy social spending? Two simple tests can help you analyze your own degree of social spending.

Test No. 1: Did you pay $57,000 or more for your car���a 50%-plus premium to the average $38,000 new car price?

Test No. 2: How many rooms in your home are used by people every single day? Divide that number by the total number of rooms in your home. Is it 50% or less?

A ���yes��� to both of these questions puts you in the land of excess and ego. Within reason, there���s nothing wrong with social spending. It is a sport everyone wants to play, but it requires a personal risk assessment. If physical wealth is mandatory, social wealth is discretionary. A basic tradeoff: To what degree will you put your physical security at risk so you can display social wealth?

Those who are financially conservative may avoid significant social spending until they have enough physical wealth stashed away to cover the rest of their life. Those who are more aggressive may practice ���classflation,��� or heavy spending to appear in a higher social class than they can currently afford. While this imagery can jeopardize future physical comfort, it���s a popular pastime.

The physical vs. social wealth tradeoff also affects career decisions. You can maintain basic food, shelter and health care with most jobs. By contrast, acquiring significant social wealth might mean becoming a 60-plus hour-a-week workaholic. Is it worth it?

In addition, physical vs. social wealth could drive your investment management. Your ���physical portfolio��� might hold enough money to maintain basic physical comfort without working for the time period you desire. A 30-year-old may choose to keep just one year of physical wealth, while a 60-year-old might look to protect 10 years or more. In investing lingo, this could be called ���assessing your risk tolerance.���

The physical portfolio is invested in dull, safe stuff, such as money market funds, short-term bonds, life insurance cash value and similar financial assets. Any amount by which after-tax earnings from these safer assets falls below inflation is, in effect, an insurance premium you pay to protect the money involved.

Your ���social portfolio��� can be like Las Vegas, without needing a plane ticket. Being discretionary, you may choose to buy risky investments���the kind that can beat inflation, but at the risk of large periodic losses. They are great sport, offer respectable gambling and could allow you to indulge in even more social spending. If your physical portfolio provides downside protection, your social portfolio offers upside potential.

Whether it���s spending or investing, only you can decide how best to balance your physical and social wealth. It���s basically another version of the fear-to-greed continuum. Where do you stand? To get at the answer, try assigning monetary values to your physical and social wants and needs.

Tom Welsh is a certified management accountant in Raleigh, North Carolina. He has been the chief financial officer at several manufacturing companies and is founder of Value Point Accounting, where he helps businesses manage product and customer profitability. Tom can be reached at tomgwelsh@valuepointaccounting.com.

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Getting Used?

IN THE PAST, we���ve always bought certified preowned cars. We know new cars lose a big chunk of their value when you drive them off the lot, so we had our eye on a used car when we started our search earlier this year.

Our goal was a Mercedes Benz GLC 300 AWD 4MATIC. My husband enjoys the negotiating and drama that comes with buying a car, so he investigated choices, checked out prices at dealerships and was ready to start his usual two-to-three-month car hunt. Seriously.

He discovered, as in years past, that the certified preowned cars, or CPOs, available to us were leased or loaner cars with all the expensive bells and whistles. But because the cars had depreciated, they had always provided good value, along with a decent warranty.

This time around, however, those bells and whistles turned out to be a significant added cost. The price of a CPO suddenly didn���t look so attractive, plus some of the options weren���t ones we wanted. There was the panoramic roof, which we often forget we have and never open. There was the car���s GPS, which is less reliable than a cell phone GPS. And, of course, the cars already had miles on the odometer. In January, my husband located four 2016 CPOs, ranging from $34,900 to $38,000.

Our first surprise: They were almost the same price as a leftover, brand new 2018 model. The manufacturer���s retail price on a 2018 GLC 300 AWD was a little over $40,000. The vehicle had no miles on it and was ready to drive off the lot. But you also had to pay for the options already included. It was too late to build your own, and incentives for the 2018 models were weaker than those for 2019.

Our next surprise: Even better than the 2018 model was a 2019 bought through Costco. The store identified a dealership that was approved for the transaction and, much to my husband���s surprise, it was quick and simple.

The Costco discount got us into a new model 2019 vehicle with options for under $40,000, excluding title, taxes, destination, registration, tags and other fees. This was less than the price of a leftover new 2018 model. In fact, several options in the 2018 model are now standard equipment on the 2019.

The best part was that we could build the new car from the wheels up. Gone was the expensive sunroof, the GPS and so on. It took eight weeks for the car to be built and shipped from Germany. The dealer even delivered the car to our front door.

An hour later, I had one happy husband driving around in our new car. It even came with an added benefit: savings on car insurance. It seems the added safety features make a difference. Moral of the story: Do your homework, check multiple sources���and don���t assume a certified preowned car is your best deal.

Sonja Haggert’s previously article was Check’s in the Mail. She’s the author of Invest, Reinvest, Rest. You can learn more at SonjaHaggert.com.

HumbleDollar makes money in three ways: We accept�� donations, ��run advertisements served up by Google AdSense 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 merchandise, you don’t pay anything extra, but we make a little money.

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Solomon on Money

THE MOST WIDELY read book of all time, the Bible, has a lot to say about money. According to biblical scholars, money and wealth are mentioned more than 2,000 times. Out of the roughly 40 parables Jesus told, nearly half speak of money.

Why does the Bible make such a big deal about money? The answer belongs in a Sunday sermon, not here. Still, I believe there���s a great deal to be learned from what the Bible says about money.

Below are eight verses, all written by King Solomon. Solomon was the wealthiest man of his time. But he was also renowned for his great wisdom. Although he lived almost 3,000 years ago, his insights on money and wealth remain relevant today. Here���s Solomon on money:

1. ���A wise man thinks ahead; a fool doesn���t, and even brags about it!��� (Proverbs 13:16)

While this applies to life in general, it also has huge implications for our finances. Do you know what you would do if a severe recession knocked down the value of your stocks by 40%? If you lost your job, do you have a rainy-day fund to see you through the next six months? Have you thought about the retirement you want and when you want it?

The notion of retirement didn���t even exist in Solomon���s time. Thinking ahead is even more important today���and, thanks to the magic of compound interest, planning early pays enormous dividends.

2. ���Lazy hands make for poverty, but diligent hands bring wealth.��� (Proverbs 10:4)

This one isn���t rocket science, but sometimes we need to be reminded about the simple stuff. If you���re a student, are you applying yourself diligently? The greatest financial investment you can make while in school isn���t a Roth IRA, but your own education. If you���re in the workforce, are you developing new skills or simply coasting? More than ever before, if you aren���t advancing your skills, you���re becoming obsolete.

In finance, we are so obsessed with maximizing returns that we forget that the two fastest ways to increase our net worth are by earning more income and by saving a greater proportion of it. You can achieve the former by working harder and by sharpening your skills, so you���re more valuable in the workplace. Both require diligence.

3. ���Just as the rich rule the poor, so the borrower is servant to the lender.��� (Proverbs 22:7)

The Bible doesn���t mince words: Whenever I borrow, I���m setting aside a portion of my future wages to service that debt. In effect, I am working for the lender���the credit card company, the bank and so on���until my debt is paid off. Certainly, some forms of debt can be beneficial. Mortgage debt and student loans come to mind. Still, before borrowing, ask yourself: What future freedoms am I giving up by taking on this debt?

4. ���The wise store up choice food and olive oil, but fools gulp theirs down.��� (Proverbs 21:20)

When it comes to personal finance, there���s really nothing new under the sun. After all, this was written about 3,000 years ago. I believe 90% of our financial problems go away if we just learn how to save, especially from an early age. I have made my share of investing mistakes. But the one saving grace in my financial life has been the ability to save consistently. The Bible says, ���Love covers over a multitude of sins.��� In personal finance, there���s a corollary: Saving money covers over a multitude of financial sins.

5. ���Invest in seven ventures, yes, in eight; you do not know what disaster may come upon land.��� (Ecclesiastes 11:2)

Solomon is referring to shipping ventures, which in ancient times were high risk, high reward undertakings. By investing all of your money in one ship, you could make several times your money or you could lose it all. Sound familiar? Betting all your money on one stock could make you fabulously rich���or leave you broke. The investing principle is clear: diversify, diversify, diversify. Ignore this at your financial peril.

6. ���Dishonest money dwindles away, but he who gathers money little by little makes it grow.�����(Proverbs 13:11)

Promises of high returns, with little or no risk, are often made. While alluring, such thinking totally contradicts one of the fundamental laws of finance: To achieve higher returns, you must also assume higher risk. Those who invested with Bernie Madoff learned this principle the hard way.

7. ���Pride goes before destruction, a haughty spirit before a fall.��� (Proverbs 16:18)

Humility is an underrated virtue in finance. Humility is acknowledging that we can���t pick stocks that will outperform, so we buy index funds. Humility is realizing that we can���t predict the direction of markets, so instead we dollar-cost average and simply buy and hold. Humility prevents us from deluding ourselves into thinking that we���re the next Warren Buffett during raging bull markets. Instead of pouring even more money into our winners, humility leads us to rebalance our portfolio. In short, humility keep us from taking unnecessary���and likely uncompensated���risks, allowing us to outperform overconfident investors over the long run.

8. ���The generous will themselves be blessed, for they share their food with the poor.��� (Proverbs 22:9)

You���ve heard the saying, ���Money is the root of all evil.��� While this comes from the Bible, it has been misquoted. The actual verse: ���The love of money is the root of all evil.��� It���s all too easy to pursue money as an end in itself, rather than as a means to an end. We start out loving what money can provide for us���vacations, nice cars, financial security���but end up falling in love with money itself. When asked how much money was enough, billionaire John D. Rockefeller replied, ���Just a little bit more.���

How can we rectify our relationship with money? I believe the answer is to give some of it away. Giving to the needy is a genuinely good thing to do. But surprisingly, the act of cheerful giving also confers many benefits upon the giver.

First, generosity loosens the grip of materialism on our lives. By giving money away, you demonstrate mastery over it. Money loses its control over you when you give it away. Second, giving money to causes you care about brings joy. I think this has to do with how we���re wired as human beings. Compassion and a need for social connection define us. We are better together. I don���t think it���s a coincidence that the word miser and miserable share the same root. Misers often are miserable.

The third, and most important, reason to be generous is���in my opinion���based on the Christian notion of stewardship: I give because God gave to me first. I have received so many gifts: my intellect, abilities, drive, physical health, the good fortune to be born in America, the family I grew up in, the people who entered my life. These gifts enabled me to build the wealth and security I have today. Since I am merely the steward of what I���ve been given, I give back in gratitude.

John Lim is a physician who is working on a finance book geared toward children. His previous articles include Out on a Lim,��My Sentence��and��Yielding Clarity . Follow John on Twitter @JohnTLim .

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Bet Your Life

INCOME ANNUITIES are a simple, cost-efficient way to generate guaranteed retirement income, and yet they account for just 5% of overall annuity sales. My contention: They can play a unique role in a portfolio���and deserve serious consideration by anyone planning for retirement.

Full disclosure: I���m co-founder of Saturday Insurance, an online company that offers income annuities and other insurance products directly to consumers. I also know that, when most people hear the word ���annuity,��� they cringe, and rightfully so. Over 95% of the annuity market is made up of tax-deferred variable and fixed annuities���investment products that are often complicated and expensive. But don���t let the word ���annuity��� scare you away from income annuities.

Why not? In retirement, there are three key financial risks we all face:

Longevity risk���the danger we���ll outlive our savings.
Market risk���the chance that investment returns will be either bad or volatile, and perhaps both.
Inflation risk���the likelihood that the cost of goods and services will rise.

An income annuity is one of the few financial products that can address all three risks. With a lifetime income annuity, you pay a lump sum to an insurance company in exchange for monthly ���annuity payments.��� Like pension payments, annuity payments are guaranteed for life, no matter how long you live or what happens in the financial markets. Typically, income annuities come in two varieties, immediate (payments start right away) or deferred (payments start in the future). You can also include an ���inflation rider��� with your annuity, which increases your annuity payment annually and helps to offset future inflation.

In addition to reducing financial risk, income annuities can provide competitive returns. Based on recent quotes from A-rated insurers, a 65-year-old man investing $100,000 in an income annuity would receive $554 per month and a 65-year-old woman would receive $510 per month. (Because women tend to live longer, they receive a slightly lower payment.) These amounts are the equivalent of 6.6% and 6.1% annual withdrawal rates, respectively. Assuming you live to the average life expectancy of 85, these income rates roughly equal the return on high-quality corporate bonds. That���s not bad, given that the annuity payments are guaranteed to continue, even if you live far longer.

Some retort that the return from income annuities is nowhere near long-term stock market returns. That���s true. But beating the stock market isn���t what income annuities are built for. Rather, income annuities are designed to provide a guaranteed paycheck that protects you from longevity risk and gives you an attractive, risk-adjusted return on your investment���and they do that job very well. On top of this, income annuities are simple to understand and require limited, if any, management in retirement���something that becomes more appealing as retirees get into their 80s and 90s.

What���s the catch? You give up upside. While your annuity payments won���t go down if the financial markets tank, they also won���t go up if the markets do well. You also give up liquidity. Once you purchase an income annuity, you���re locked in and can���t change your mind. Another consideration is the ���early death��� risk. With a traditional income annuity, the payments stop upon death, so you would lose 100% of your investment if you died the day after buying an income annuity. In exchange for reducing your annuity payment by 5% to 10%, most insurers will give you a ���return of premium��� benefit that guarantees that you���or you and your heirs���get back payments equal to at least your original investment. A good deal? For the record, I prefer to take the risk of an early death and go for maximum retirement income.

Here are four recommendations for anyone thinking about an income annuity:

1. Treat them as a lower risk, lower return asset���similar to bonds.��When settling on your retirement portfolio���s asset allocation, your income annuities and bonds should be balanced with stocks and other assets that can deliver long-run growth.

2. Most people shouldn���t allocate more than 30% of their portfolio to income annuities.��That way, you���ll still have a sizable buffer of assets to support unexpected expenses and to generate growth.

3. Consider buying income annuities over time, starting 10 to 15 years before retirement.��Like bonds, the cost of income annuities changes as interest rates change. Buying income annuities over time can help you average your cost over interest rate cycles, similar to dollar-cost averaging with mutual funds.

4. Buy early, but not too early. We���ve seen some firms marketing income annuities to individuals in their 20s and 30s as a way to build their own pension. At this age, you really need growth and liquidity, which is the opposite of what income annuities offer. It���s best to stick with stocks and bonds when you���re far from retirement, and then average into income annuities as you get closer.

Dennis Ho is a life actuary and chief executive of Saturday Insurance, a digital insurance advisor that helps people shop for income annuities, long-term-care insurance and other insurance products. Prior to co-founding Saturday, Dennis spent 20 years in the insurance industry in a variety of actuarial, finance and business roles. He can be reached at dennis@saturdayinsurance.com��or��via LinkedIn.

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Under Attack

THE FINANCIAL site MarketWatch has been running a series about the lives and budgets of Americans who retire abroad. My wife Jiab and I���who moved from Texas to Spain���were one of the first couples featured, along with a husband and wife who now live in Chile. Both articles made clear there were plusses and minuses to such a move���experiencing new things, but also being away from family���and that we weren���t advocating this for everyone.

From some readers, we got positive affirmation, follow-up questions and many ���good luck, but that���s not for me��� comments. What surprised me, however, was the amount of hostility, which mostly came in three forms:

BWAs��(���But what about���?���). Some people rejected the articles because all facets weren���t explained. ���You don���t mention hunting, which I like��� or even ���You didn���t fully explain the tax impact of living abroad,��� along with the suggestion that we must be tax dodgers. Did these readers really expect an article of under 1,000 words to explain every nuance?
BIBs��(���But I bet������). These were the commenters who accused us of hiding facts, such as we probably lived in a cramped ���shoebox��� or had to use witch doctors for health care.
PAPs��(personally attacking people). The worst launched into ad hominems against us and the other couple, accusing us of being ���disloyal��� to our country, that we must ���love living in the 1800s��� and even ���abandoning��� our children.

This wasn���t just skepticism. Some readers clearly went straight into attack mode based simply on the notion of retiring abroad. All this made me curious. People who read financial websites are clearly seeking to be better informed. Many of the attackers also admitted to traveling little outside the U.S. Why the strong reaction?

Coincidentally, Forbes recently ran an��article that sheds some light on the answer. Jonathan Look Jr. explains how travelers to exotic places are often met with a tepid reaction by friends back home. Look cites psychological studies that attribute this reaction to two factors: unrelatability and envy of the experience. Humans often prefer a less enjoyable but shared experience to an extraordinary one experienced alone.

We humans are tribal in our thinking. We look with suspicion on anyone who deviates from the herd���as those who go against the grain will tell you. We also like to have our paths clearly defined. Too many choices can be not liberating, but confounding.

If we scorn differences, not just socially and politically, but also financially, the loss can be ours. Maybe we shouldn���t claim Social Security as soon as we���re eligible, like all our friends say. Perhaps the broker used by everybody in our family isn���t the best choice. Maybe our neighbors are wrong and remodeling the house won���t be a big moneymaker.

A resistance to other options can lock us into existing decisions that may not be in our best interest. It can lead us to view alternatives not as possibilities to consider, but as criticism of our current financial choices. My fear: This sort of skepticism can too easily turn into cynicism, leading us to reject notions that could be useful to us.

Jim Wasserman is a former business litigation attorney who taught��economics and humanities for 20 years. His previous articles include Terms of the Trade,��When in Rome��and��Bundle of Joy. Jim���s three-book series on teaching behavioral economics and media literacy,���� Media, Marketing, and Me , ��is ��being published in 2019.��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.

HumbleDollar makes money in three ways: We accept��donations,��run advertisements served up by Google AdSense 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 merchandise, you don’t pay anything extra, but we make a little money.

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Out of Stock

A NEW FIRM called Life + Liberty Indexes has created what it calls the Freedom 100 index of emerging markets stocks. Unlike other indexes, which typically weight stocks by their market value, the Freedom 100 weights countries by measures of freedom. These include freedom of religion, freedom of the press and freedom of assembly, among others. In short, the Freedom 100 looks like it could have been created by the authors of our Declaration of Independence.

Result? The Freedom 100 looks very different from other indexes of emerging markets stocks. For example, the FTSE Emerging Markets index, on which Vanguard Group bases its emerging markets fund, allocates more than a third of its assets���the largest weighting by far���to China. It also includes allocations to Russia, Saudi Arabia and other places where ���life, liberty and the pursuit of happiness��� isn���t exactly the government���s motto. Meanwhile, the Freedom 100 excludes all of those countries.

Life + Liberty just launched, but it raises a broader question: Should you align your investments with your values? With the growth of index funds���which seek to own all the stocks in a particular market���this is a question worth considering. While I���m a big believer in index funds, I recognize there���s an unavoidable downside: When you own an index fund, you unwittingly become a shareholder in many companies you might not otherwise want to own. The S&P 500 index, for example, includes companies that make cigarettes, alcohol and weapons.

The good news is, there���s a growing number of ways to solve this problem. In addition to the Freedom 100, lots of other ���socially responsible��� indexes exist, and lots of funds have been built around these indexes. BlackRock offers nine��such funds, covering domestic and international markets. Vanguard��offers several as well. If you wanted to build your entire portfolio around these funds, you could. But before you do, consider two key questions:

How do you define ���socially responsible���?��Some years back, I worked for a firm that had a policy against buying stocks in alcohol, tobacco and gambling-related companies. It was, I thought, a good policy and successfully screened out most so-called ���sin��� stocks.

But there���s no universal definition of ���socially responsible.��� You could just as easily make it a policy to exclude manufacturers of assault rifles, pesticides and opioids. Or you could judge companies based on their environmental track record, their approach to charitable giving or their respect for workers��� rights.

Everyone has their own criteria. In my own case, it drives me crazy that, via index funds, I am a shareholder in a company called Navient, which is a big player in student loans���with a��reputation��for being not so friendly. To complicate matters further, many companies score well on some social responsibility criteria, but poorly on others. Want to tilt your portfolio to align with your values? The first question is how you want to translate your values into an investment policy.

Is investment performance a concern?��For years, many have wondered whether it helps or hurts performance to invest with a socially responsible filter. It hasn���t been an easy question to answer. As noted above, there���s no single definition of socially responsible. Many of these strategies are new, so there isn���t enough data to make reliable judgments.

That said, the��data does��indicate that, on balance, you won���t sacrifice investment performance���and you might even benefit���if you went with a socially responsible portfolio. But there are no guarantees. Indeed, the only certainty is that your results will vary from the overall market. For that reason alone, if you try socially responsible investing, you might try it with just a portion of your investment dollars.

Still want to better align your portfolio with your values? Consider three options:

1. Funds.��Today, there are more than 350 funds in the ���socially responsible��� category. That���s both a blessing and a curse. Because everyone defines the term differently, it���ll require a good amount of research to find one that matches your own personal philosophy. But there���s probably one out there that will be a reasonably good fit.

2. Custom portfolio.��If there isn���t a fund that meets your needs, another approach would be to build your own portfolio from scratch. This would allow you to effectively build your own personal index fund tailored to your values. My only caution: If you go this route, be careful of costs. Because of brokerage commissions and other trading costs, this would make sense only for large portfolios.

3. Offset your sin stock profits with charitable giving.��If you aren���t interested in building your own socially responsible portfolio or choosing one off the shelf, there���s another approach you might consider: Stick with standard index funds, but then make it an intentional part of your process to contribute to charities that reflect your values. That way, you would take profits from companies that you consider socially irresponsible���and use those dollars to support causes that��are��to your liking.

Adam M. Grossman���s previous articles��include Say No to Mo,��Playing Nice��and��Stepping��Out . 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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A Penny Saved

CALL IT THE NEW conventional wisdom: Forget trying to spend less���and instead focus on earning more.

This change in thinking is no great surprise. We have endless opportunities to make an extra buck, thanks to all the ���side hustles��� available in our ���gig economy.��� Meanwhile, many folks bristle at the admonitions to spend less on lattes, happy hours and avocado toast. Let���s face it, will eliminating such expenses really put us on the fast track to financial freedom?

As you might gather, I have some sympathy with this new way of thinking���but I still believe it���s misguided.

It���s not that I have anything against working hard. I have done so my entire life. Early on, I did it mostly to make extra money. Today, I work long hours because I���m passionate about what I do. But I still think the idea of focusing on earning more, rather than spending less, is a mistake���for four reasons:

1. Spending less is far more tax-efficient. Ben Franklin purportedly said, ���A penny saved is a penny earned.��� But in today���s world, that isn���t quite true.

If I decide not to take my wife out for a $100 dinner, I���m $100 better off. But to improve my bank balance by $100 by working more, I might need to earn perhaps $170. Why? I���ll have to pay federal and state income taxes on the $170 at my marginal tax rate. On top of that, I���ll have to fork over payroll taxes as both an employee and the employer, assuming I���m working as a contractor.

2. Who says I���ll save the extra money I earn? If I consciously choose to spend less, I���m committing to save more. But if I choose to work longer hours so I can earn additional dough, there���s no guarantee the money will get saved. In fact, after all that extra work, I���ll probably feel I deserve to treat myself���and here comes that $100 dinner.

3. Time is more valuable than money. Indeed, it���s the ultimate limited resource. How many hours would you have to work to earn $170 of pretax income? If it���s work you���re passionate about, the hours involved don���t matter. But if it���s grunt work, you���ve traded precious time for fleeting dollars. That seems like a bum deal���unless you absolutely need those dollars to stay afloat financially.

4. Less spending could bring more happiness. According to the General Social Survey, 31% of Americans described themselves as very happy in 2018, barely higher than the 30% who described themselves that way in 1972, when the survey was first conducted. Over the intervening 46 years, U.S. inflation-adjusted per-capita disposable income rose 131%. In other words, we now have more than twice as much money to spend, but we���re no happier than we were in the early 1970s.

Perhaps spending more isn���t the answer. Instead, maybe the key to happiness is greater gratitude for what we already have���and perhaps even spending less.

My wife and I love to go out to eat, and we probably do it a little too often. Would we be less happy if we stayed home tonight? Maybe not. In fact, if we ate out less, that might make each restaurant meal feel more special���and perhaps we���d end up boosting our happiness.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook .��His most recent articles include Tax Rate Debate,��That’s Enough��and��Third Rail . Jonathan’s ��latest books:��From Here to��Financial��Happiness��and How to Think About Money.

HumbleDollar makes money in three ways: We accept��donations,��run advertisements served up by Google AdSense 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 merchandise, you don’t pay anything extra, but we make a little money.

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