Jonathan Clements's Blog, page 361

School’s In

LOOKING TO PAY for your child���s college? With costs increasing at an alarming rate, you may feel like you���re swimming upstream. Much like saving for retirement, you need to begin socking away money for college as early as possible. Each year that passes is one less year that your savings have the opportunity to grow.

Start by getting a clear picture of college costs today. You can use the Department of Education���s��College Scorecard��to look up the annual cost of specific colleges. Unfortunately, you will need to adjust these numbers for inflation between now and when your youngster attends. I typically assume 5% per year.

I favor a three-legged approach to college savings. What does this mean? You pay for college from three different sources���a 529 college-savings plan, a taxable brokerage account and what I call ���miscellaneous���:

The first third of your total college funding will come from a 529 plan. A 529 allows you to contribute after-tax dollars, invest those dollars on a tax-deferred basis and eventually withdraw the proceeds tax-free for qualified education expenses.

The tax advantages make this account a great way to start saving. Why not fund all of college with a 529 plan? I prefer to maintain some flexibility. Any money that goes into a 529 plan needs to be used for qualified education expenses. If you save too much in a 529, any growth that gets withdrawn for other purposes is subject to income taxes, plus a 10% penalty.

The next third is paid for with a regular taxable . There aren���t any tax advantages, but flexibility is maximized. If you need to use the funds to pay for your child���s college expenses, the money���s there. If you don���t need it for college, you���re free to use the money for other needs.
That brings us to ���miscellaneous.��� The final third of your college funding will come from current income, any scholarship��money and tax credits while your kid is in college. Scholarships are given based on both financial need and merit. The two tax credits are the American Opportunity Tax Credit and the Lifetime Learning Credit. These can provide up to $2,500 and $2,000 in annual tax credits, respectively, but your family���s income has to fall below certain thresholds.

How does this all stack up? Let���s assume you have a newborn that���s going to attend your local state university, with a total annual cost today of $20,000. In 18 years, this cost grows to about $48,000, assuming 5% inflation. To fully fund four years of college, you���ll need to come up with some $200,000.

With the three-legged approach, you need to accumulate two-thirds of this amount by the time your child reaches age 18, or $133,333. Assuming an annual growth rate of 5% on your investments, you will need to save $381 per month if you start when your kid is born. What happens if you wait to start saving until your child is five years old? The required monthly contribution increases to $608.

What about the $66,667 for the third leg? This is equal to $1,389 per month for four years. To cover part of this $1,389, you���ll have the $381 you were previously saving every month for college, plus about $400 per month will be freed up once your kid is out of the house. A $2,000 annual tax credit will give you another $167 per month. That leaves a gap of just $441 per month. This might be funded with scholarships, your child���s earned income or student loans.

Ross Menke is a certified financial planner ��in Nashville, Tennessee. His previous articles include Into the Woods,��The Happy Employee��and��Par for the Course . Follow Ross on Twitter @RossVMenke .

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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Don’t Bank on It

I’VE LATELY BEEN getting a lot of questions about a pair of lookalike investments: U.S. Treasury bonds, which are currently yielding around 1.8% to 2.6%, and online bank savings accounts, which offer similar yields. In other words, you could earn just as much interest in a simple savings account as you could if you tied up your money for a period of months, or even years, in a government bond.

The question I keep hearing:�����Why in the world would anyone choose government bonds?��Why not just stick with cash for now, until bonds start paying more?���

If you���re concerned about risk, I see two reasons you shouldn’t ignore Treasury bonds. The first is relatively straightforward: While bank accounts are insured by the federal government, via the FDIC, that coverage is capped at $250,000 per account. A Treasury bond, on the other hand, is also backed by the U.S. government,��but without any limit. If your savings exceed the FDIC threshold, that would be a good reason to choose Treasury bonds over cash, even when the interest rates are the same.

The second reason is more subtle and maybe more important. It has to do with correlation.

What���s correlation? In simple terms, it���s the degree to which one investment zigs when another zags. It���s the fundamental principle behind diversification. When investments are positively correlated, they tend to move up and down together. On the other hand, when investments are negatively correlated, they’ll often move inversely���that is, when one goes down, the other will go up, and vice versa. For that reason, investments with negative correlations to stocks are the holy grail of diversification. They help preserve the value of your portfolio when the stock market is depressed.

How do Treasury bonds and bank savings accounts stack up in terms of correlation? This is where our two lookalike investments start to look less alike. The correlation between stocks and cash is zero, which means they move completely independently of each other. That’s a good thing, and that’s why cash is a key tool for diversification.

But now consider Treasury bonds. Over the past 15 years, according to research from��Morningstar, Treasurys have delivered��negative��correlation. This is the critical difference between government bonds and cash. While they may look identical because of their interest rates, that ignores the benefit bonds may offer the next time the stock market goes through a rough patch.

While nothing in the world of investments is guaranteed, this negative correlation between stocks and government bonds has been historically reliable. And I expect it to continue, because it makes logical sense. When the economy worsens and the stock market falls, investors rush to safer assets, pushing up their prices. At times like that, U.S. government bonds are perceived as the safest available refuge.

One final thought on this topic: You’ll notice that I have been referring here only to government bonds. While there are many other kinds of bonds, I favor only government bonds���including those issued by municipalities���because they���re the only ones that deliver this valuable negative correlation to stocks.

I’d be especially wary of high yield bonds, otherwise known as junk bonds. In a low-rate environment, some people favor these bonds, which pay higher interest rates. But that ignores their risk. Over the past 15 years, high yield bonds have exhibited a strong��positive��correlation with the stock market. Translation: They offer scant diversification benefit. For that reason, high yield bonds���in my opinion���have no place in an investment portfolio.

Adam M. Grossman���s previous articles��include Danger Ahead,��Know Doubt��and��Beat the Street . 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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Where It Goes

WHEN FINANCIAL writers tackle the topic of spending, the result is all too predictable: lectures on the dangers of lattes, the glories of budgeting and the financial apocalypse engendered by avocado toast, as well as suggestions that earlier generations were far more prudent.

I’ll admit it, I haven���t entirely avoided these pitfalls.

So how should we think about spending? I would focus on how your income gets divvied up among four key categories:

1. Savings.��Take however much you add to your employer���s retirement plan each month, and tack on any additional money you sock away. What���s that amount as a percentage of your pretax income?

If you���re still in the workforce, aim to save 12% to 15% of income toward retirement, though you might shoot for somewhat less if you���re eligible for a traditional pension plan or your employer makes matching contributions to your 401(k) or 403(b). What if you have other goals, like the kids��� college or a house down payment? You should be saving additional money, on top of the 12% to 15% for retirement.

2. Taxes. The taxman���s take varies enormously from one family to the next. But for what it���s worth, households lost an average 14% of adjusted gross income to federal income taxes in 2016, according to IRS figures.

Meanwhile, if you���re working, you���ll lose another 7.65% to Social Security and Medicare payroll taxes, and almost double that if you���re self-employed. What if you���re retired? Welcome to the big bonanza: Not only do you no longer need to save for retirement, but also you don���t have to cough up payroll taxes. Add those two together and your monthly outgoings might drop 20% or more���which is the reason it���s often said retirees need 80% or less of their preretirement income to live comfortably.

3. Fixed costs.��As a rule of thumb, I often suggest that folks keep their fixed living costs���mortgage or rent, car payments, utilities, groceries, insurance premiums and so on���to 50% or less of pretax income. Those who are retired, and hence don���t have to worry about payroll taxes or saving for retirement, might aim to keep fixed costs to 60% of income.

That 50% or 60% is a tough goal to hit, but a worthy one. Why? You���ll have more financial wiggle room���and thus fewer money worries. If you���re still in the workforce, it will be easier to save and you���ll be in better shape if you find yourself out of work. You���ll also have more money to devote to our fourth and final category.

4. Discretionary spending.��This is the stuff that helps make life special: vacations, eating out, concerts, amusement parks, gifts to family and charity. It���s the money we choose to spend, as opposed to our fixed costs, where we���re pretty much locked in.

A reader recently asked me how much was reasonable to spend on vacations. I���m not sure the amount much matters���as long as you���re saving enough, you aren���t racking up credit card debt and you feel you���re getting plenty of happiness from the dollars involved. For some folks, travel will be a big part of their discretionary spending, while others will have different priorities.

So what does financial happiness look like? Here���s today���s gross generalization: We should maximize savings, minimize taxes, minimize fixed costs and maximize discretionary spending.

To be sure, these generalizations come with all kinds of caveats. Sometimes, it makes sense to generate more taxable income, especially if we find ourselves in a year with relatively little income. Some families may opt for higher fixed costs, because they get great pleasure from owning a more expensive home or car. Some folks may be too focused on socking away money���though the national savings rate suggests this isn���t exactly a widespread problem.

Are you salting away enough money every month for your various goals? You should feel free to do whatever you want with the rest of your money, even if it involves copious quantities of lattes and avocado toast.

That brings us back to discretionary spending. I find it hard to imagine how you could have too many dollars stacked against this category. I���m not advocating that folks fritter away money on nonsense. But it���s a great pleasure to write a check to your favorite charity or head out to dinner with friends���and that���s especially true if you know you can easily afford the cost involved.

Follow Jonathan on Twitter��@ClementsMoney��and on Facebook.��His most recent articles include May’s Hits,��Down the Drain��and��Great Debates. 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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Why Wait?

THE OLD ADAGE says it���s never too late to change. Yet, once folks over age 50 decide they need to change careers, moving early has some key advantages:

It takes time. Career transitions can be slower than anticipated.
It legitimizes the move. Switching before the traditional retirement age may demonstrate your commitment to a new career.
It���s enjoyable to switch. If you know things aren���t currently working, why not make the change?

I faced my own career-change decision at age 51. Working as a strategic planning consultant in the telecommunications business had lost its appeal. My primary focus was the maturing cable and programming industry���which, to my dismay, started rapidly consolidating, losing its entrepreneurial flavor along the way. Constant travel made the job even less fun. As an alternative career, I wanted to help individuals tackle financial issues, but without selling financial products. The key question: When should I start this transition?

While continuing to work as a consultant, I took evening courses for two years, studying to become a certified financial planner. I also worked on a detailed business plan, which required time-consuming research. Thanks to this early leg work, I was able to develop the new business, even as I continued to consult.

Now, I often help my financial planning clients with similar career decisions. Some take no action, while others see the handwriting on the wall and adapt.

Kate, a successful print advertising executive in her mid-50s, told me a decade ago that print advertising would experience declining revenue, and would be replaced by rapid growth in digital and social media marketing. While she anticipated the trend, Kate stuck it out in her print media role. Now, she feels trapped and counts the days until retirement.

Tim, age 58, was more proactive. He was a sales manager who worked long hours and had stressful goals to meet each quarter. He understood that, for financial reasons, he would need to work past the traditional retirement age. But he also couldn���t see running a big sales team for much longer. He wanted to shift to a new role, where he trained and developed sales teams.

Potential employers initially questioned whether he had the necessary experience to develop curriculum and deliver sales training materials. But Tim understood that delaying the change would only diminish his chances of a successful career switch. He worked to gain the needed expertise���and today, at age 64, he has the new career he wanted.

People may delay career shifts for legitimate reasons. Switching during peak earning years can have a financial cost. Some haven���t yet figured out what the alternative is. But for those who have the drive and vision to reshape their careers,��taking charge sooner has distinct advantages.

Rand Spero is president of Street Smart Financial, a fee-only financial planning firm in Lexington, Massachusetts. His previous article for HumbleDollar was Help Yourself. Rand ��has taught personal finance and strategic planning at the Tufts University Osher Institute, Northeastern University’s Graduate School of Management and Massachusetts General Hospital.

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Fighting for Peace

IT���S TIME AGAIN for our family���s semi-annual budget review. The budget meeting is typically initiated by the Household CFO, which would be me. Who is the HCFO in your home? You can probably figure it out from the following job description provided by Thomas Stanley and Sarah Fallaw in The Next Millionaire Next Door:

“The role of Household CFO is to ensure his/her household is building wealth in order to ultimately achieve financial independence���. The Household CFO will be required to balance checkbooks, file tax returns, pay bills on time, create financial plans, create estate plans, research investments, monitor investments, and generally run all financial matters for the household. The Household CFO will serve as a check on household spending, and thus will work closely with the following individuals: Household Chief Procurement Officer and his/her team members (read: spouse/self and/or children).”

Why might a family budget meeting be a challenge? Mostly because the discussion isn���t really about money. It���s about values. It���s pretty normal for otherwise perceptive and agreeable people to have different financial priorities. These differences can create conflict in the short term, so it often seems easier to avoid and ignore them.

Dave Ramsey says, “Everyone���s personality is different, and opposites tend to attract. Chances are, one of you loves working numbers (the nerd) and the other one would rather not be tied down by what the numbers show (the free spirit). One of you might be the saver and the other is more inclined to spend. While that can cause some marital problems, it isn���t the real issue. The source of the problem is whenever one of you neglects to hear the other���s input. Or when one of you bows out from participating in the financial dealings altogether.”

How important is your spouse to your financial plan? In The Millionaire Mind, Tom Stanley wrote: “For every 100 millionaires who say that having a supportive spouse was not important in explaining their economic success, there are 1,317 who indicate their spouse was important. Of the 100 who did not give credit to their spouse, 22 were never married and 23 were either divorced or separated.”

How might your family���s budget meeting be beneficial? Even if it feels like a bloodbath, it may at least condense that conflict into just a few disagreeable hours, as opposed to continuous or spontaneous vitriol over the coming weeks or months���or even decades. Fighting for peace can be a worthwhile activity���though, if the discussions tend toward the internecine, it might be best to try some couple���s therapy.

For those who struggle with these conversations, take heart. You will need to be vulnerable to get the benefits of this process. That can be a scary place, especially if you���ve had an unpleasant experience in the past. Do not allow yourself to be a tyrant or a slave. Listen carefully and advocate well.

In Smart Couples Finish Rich, David Bach suggests initiating or reviewing a financial filing system as a way to ease into the budget process. At a minimum, this ensures that either partner can access needed documents if the other becomes unavailable. There are those who advocate making a date or weekend of these financial discussions, first establishing shared and individual values, before putting numbers to paper. The goal: Create some shared vision that will bring new energy to your family���s��financial��relationships.

Don���t let fear stop you. To paraphrase Jordan Peterson, “Dragons hoard gold because the thing you most need is always to be found where you least want to look.”

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 Taking Care,��Twelve Rules��and��Got to Believe .��You can contact Phil via LinkedIn .

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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An Old Man’s Gripes

THOMAS JEFFERSON said, ���Honesty is the first chapter in the book of wisdom.���

It���s well known that we tend to believe what we want or what fits our preconceived notions. But this is getting out of control. Here���s what drives me nuts on the misinformation superhighway:

1. ���Health care is unaffordable.��� There���s no denying health care is expensive and insurance premiums can be a heavy financial burden. And, yes, surveys find that Americans think health care is unaffordable. But what about a day at the ballpark? Is that cheap? Have you ever seen a survey about that?

Nobody, it seems, wants to spend their hard-earned money on health care. They don���t even want to fork over a modest co-pay. We each need to come to grips with health care spending as a regular part of our family budget.

2. ���Health insurance is the problem.��� Health insurance premiums reflect the cost and use of health care. If the cost and use of health care rises, so too will premiums. Health care costs drive premiums, not the other way around.

The real problem with health insurance is that it isn���t insurance at all. We expect our health insurance to reimburse us for everything we spend, rather than just for extraordinary expenses. That���s not how real insurance works.

3. ���Health insurance company profits are the problem.��� That���s ridiculous. Those profits have nothing to do with health care costs���and they represent just a small portion of health insurance premiums.

Moreover, most Americans have health care coverage that doesn���t involve insurance, because their employer is self-insuring or they���re covered by a government program. The profit margins for health insurance companies are nearly the same as regulated utilities���in the 3��% to 10% range. When you read that an insurance company has billions in profits, divide it among all the policies in effect and you���ll see the individual impact is modest.

4. ���Teachers are underpaid.��� It isn���t possible to pay good teachers commensurate with the value they bring to a community or a child. But generally, they aren���t underpaid. Yes, you need to consider their salary. But you also need to consider vacation time, benefits while working and benefits received once retired, notably pension benefits.

5. ���Social Security has a surplus.��� A surplus implies you have more than is needed to meet obligations. The reality: Social Security has unfunded liabilities in the tens of trillions of dollars. What Social Security has is a reserve���a trust fund that���s gradually being depleted. The reserve, by itself, is sufficient to pay current benefits for about 53 months.

6. ���Social Security is going bankrupt.��� Wrong again. As long as there are taxes coming in, Social Security can���t go bankrupt. But when the Social Security trust fund is depleted, the incoming taxes won���t be sufficient to pay 100% of promised benefits.

7. ���Congress stole the trust fund.��� This is a rumor that just won���t die. Nobody stole the Social Security trust fund. It���s invested in special interest-generating Treasury bonds. Last year, those bonds paid $80 billion in interest, which was then used to pay Social Security benefits.

8. ���Congress should give retirees more.��� There���s a misconception that the annual Social Security cost-of-living increase is determined by Congress or the president, both of whom get the blame when there���s little or no ���pay raise��� for retirees.

But in truth, the increase is based on the annual change in a key inflation measure, CPI-W. There���s no annual decision by Congress or the president. Many people want to move to CPI-E, which is designed to better reflect the inflation rate experienced by seniors. But CPI-E is no guarantee of a higher Social Security cost-of-living increase���and often the difference isn���t significant.

9. ���Congressmen are paid their salary for life.��� This is another persistent rumor. To receive a pension, a member of Congress must have five years of service, which means a member of the House of Representatives would need to be reelected twice. A pension is nothing close to full pay. And, yes, members of Congress pay Social Security taxes and contribute toward their pensions.

10. ���Members of Congress are overpaid.��� At $174,000 a year, which is nearly three times the median household income, it���s easy to feel members of Congress are paid too much. But I���d argue Congress is underpaid.

Think of it this way: You have a good job or run a small business. You have a family. You then win a job in Congress���which you may lose two years later. Could you afford to move your family to Washington, DC? Could you afford to maintain two homes, one in your home state and one in the District of Columbia? The cost of living in the Washington area is nearly 60% higher than the national average. Members of Congress had their pay last increased more than a decade ago. Some estimate that tight family finances compel 50 to 100 members to live in their offices.

11. ���Times��are different.��� Change doesn���t mean loss of opportunity. Rather, it means different opportunities���requiring different strategies to cope. Yes, baby boomers had the advantage of the post-Second World War economic boom. But today���s millennials have the advantage of vastly improved technology and a more open world. Why all the complaining?

12. Assumptions and consequences.��It drives me nuts that so few people ask about the assumptions used or the possible���and sometimes unintended���consequences of… just about anything. The cost, or the projected savings from, a new government program can be swayed by tweaking assumptions. Take state pension funds. Assume a higher rate of investment return and the funding can suddenly look a whole lot better.

13. ���I can���t afford to save.��� As Henry Ford may have said, ���Whether you believe you can do a thing or not, you are right.���

Except for the chronically poor, everyone can save. The first step is taking an honest look at where your money goes, especially differentiating between necessities and other spending. The secret is to pay yourself first, preferably through an automatic savings program.

14. ���How much money will I need for retirement?��� How am I supposed to know? There���s no quick and easy answer, because there are so many factors���and those factors vary with every individual. What standard of living do you want to maintain? How much savings will you need to maintain that standard of living through a long retirement that���ll likely see at least modest inflation? What will your Social Security benefit provide each month? Gather all that information and you can get a reasonable answer to your question.

15. Shopping carts. I���ve saved my favorite gripe for last���and, I���ll freely admit, it has nothing to do with misinformation. What is it that prevents so many people from returning their shopping carts to where they belong? I���ll go out on a limb here and say it���s a reflection of how these folks behave in other areas of their lives. And, yes, they probably don’t believe in facts, either.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include Money Pit,��Crying Poverty,��Shortsighted��and��Farewell Money.��Follow Dick on Twitter��@QuinnsComments.

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

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Out on a Lim

THIS WILL SOUND like heresy to buy-and-hold investors. But I believe risks are building within the financial system���and we ignore these risks at our peril.

If you���re a diehard buy-and-hold investor who, come hell or high water, plans to dollar-cost average into the stock market, feel free to skip this article. It is not for you. On the other hand, if you believe���as I do���that there are more and less advantageous times to invest one���s capital, please read on.

Like death and taxes, economic and market cycles are indisputable facts of life. It has been a long time since the U.S. has had a recession. The last one���the Great Recession���ended in June 2009. That means the current economic expansion is now a decade old. If we get through June without a recession, this will be the longest economic expansion on record.

There is no law that limits the length of an economic expansion to one decade. By the looks of it, this economic expansion is headed for the record books. But here���s my concern: Many risks and warning signs are seemingly being ignored by investors, perhaps due to the unprecedented length of the current economic cycle and bull market. Here are nine huge risks���which, I believe, investors are blithely ignoring:

1. The yield curve is inverted. Based on the difference between 10-year and three-month Treasury yields, the yield curve inverted in March of this year and again in May. As I���ve discussed previously, this has been a reliable harbinger of recessions.

In fact, I suspect the yield curve would have inverted earlier and, indeed, is currently more inverted than it appears, due to the Fed���s quantitative tightening (QT) program, which began in October 2017. As the Fed has attempted to shrink its balance sheet, QT has the effect of increasing the supply of long-term Treasurys, which raises their yields. In other words, just as quantitative easing (QE) lowered long-term interest rates, reversing QE raises them. The bottom line: Without QT, 10-year Treasury yields would likely be even lower and the yield curve even more inverted.

2. Stock market valuations���particularly in the U.S.���are very high by historical standards. By some measures, the market is as expensive as it has ever been. One of Warren Buffett���s favorite metrics for overall stock market valuation���the market value of all publicly traded stocks divided by GNP���currently stands at about 190% in the U.S. In Buffett���s own words during a 2001 speech, ���If the ratio approaches 200%���as it did in 1999 and a part of 2000���you are playing with fire.���

3. Interest rates have been lower, and lower for longer, in this cycle than ever before. The enormous importance of interest rates cannot be understated. Nothing has a greater influence on the economy and markets. Interest rates determine the price of all financial assets by discounting future cash flows. Interest rates also control the availability of credit, which is the lifeblood of the economy.

In December 2008, the Federal Reserve lowered short-term interest rates���as reflected in the federal funds rate���to essentially zero, where they remained for the next seven years, until the first rate hike in December 2015. This extraordinary policy was known as ZIRP, or zero interest rate policy. The fed funds rate remained below 2% until September 2018, or nearly a decade of extraordinarily low interest rates. To put this in perspective, from July 1954 to December 2008, the fed funds rate was below 2% for a combined total of just 66 months, or 5�� years.

I don���t pretend to know the ramifications of keeping interest rates extraordinary low for so long���but then again, neither does the Federal Reserve. One thing is certain: Easy money induces risky behavior, and money has never been easier.

4. The jury is still out on the Federal Reserve���s quantitative easing experiment. QE simply refers to the policy by the Federal Reserve to lower long-term interest rates by buying up Treasury bonds. Since the Fed can ���print��� money, this also has the effect of injecting liquidity into the economy. When the Fed embarked on this policy, it described it as a temporary measure.

But as with many things in life, the Fed may be discovering that QE was easier to get into than out of. The Fed���s balance sheet is down just 15% from its peak of $4.5 trillion. Moreover, it���s important to remember that QE is a global experiment. The European Central Bank just ended its version of QE six months ago. Japan���s QE is still going strong, buying not only bonds, but also stocks.

Where has this massive global QE experiment left us? Negative interest rates, for one thing. Both the German and Japanese 10-year bonds are slightly negative. Imagine lending your money to the government for 10 years and having to pay for the privilege. If extraordinary times require extraordinary measures���the rationale for QE in the first place���might extraordinary measures not lead to extraordinary times?

5. Corporate debt is at record levels. Right now, companies are able to pay the interest on their debt with relative ease. But what happens during the next recession? Or when interest rates eventually rise?

6. Trade wars and tariffs threaten to squelch global trade. This topic receives more than enough attention in today���s press, so I have only two words to say about it: Smoot-Hawley.

7. This year has seen a huge jump in initial public stock offerings, including tech unicorns going public. It���s expected that the money raised in IPOs this year will exceed that in 1999, the height of the dot-com boom. That fact alone is not necessarily worrisome, as our economy is obviously much larger than two decades ago. What is worrisome is the valuation and lack of profitability of this year���s crop of IPOs. Stock prices reflect investor pessimism or optimism. Too much of the latter often leads to disappointment.

8. Federal government debt is exploding even during the peak of this economic cycle. Economists Carmen Reinhart and Kenneth Rogoff wrote a paper in 2010, exploring the relationship of government debt and GDP. The one-sentence summary: When the ratio of government debt to GDP exceeds 90%, growth in GDP falls significantly.

The current economic expansion has been one of the slowest on record. One possible explanation: U.S. government debt as a percent of GDP has climbed sharply since the Great Recession, exceeding 90% in 2010 and never looking back. Today, it stands at 105%. The last time this ratio breached 90% was 1944 to 1949, due to the cost of the Second World War. Here���s something uncomfortable to ponder: What will happen to our debt during the next recession, when tax revenue will likely shrink?

9. Student debt is at record levels. To be sure, of all the forms of debt, student loans are probably the most benign, as they���re an investment in future earnings potential. Still, there are limits to even this. Today, there���s more than $1.5 trillion in student loans outstanding, which is almost 8% of GDP.

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

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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May’s Hits

IT WAS ANOTHER record month at HumbleDollar, with the highest number of page views in our 29-month history. What were folks reading? These were the seven most popular articles:

Farewell Money
Calling the Shots
After the Windfall
Debtor’s Dozen
Crying Poverty
Power of Two
Beat the Street

In May, we launched our 13-step financial life planner, which also attracted a slew of readers. But it seems most folks went straight to the end of the story, because the most visited page was step 13, which is devoted to generating retirement income.

Many, many thanks to the more than 200 readers who have support HumbleDollar with financial gifts since late April, when we launched our donation page. That’s allowed us to strip all but one of the advertisements from the home page, as well as some of the other advertising on the site.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook .��His most recent articles include Down the Drain ,�� Great Debates ��and�� Here to Retirement . Also check out his new��podcast with Creative Planning’s Peter Mallouk, as well as last week’s��article for Creative, Bet on the Humans. 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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Down the Drain

TODAY, I REVEAL this year���s most embarrassing moment: On a recent Sunday, 14-year-old Sarah���stepdaughter of a moderately well-known financial writer���spent $16.47 to have two Starbucks specialty drinks brought to her by the food delivery service DoorDash.

Let that sink in for a moment.

In our defense, my wife and I were away for the weekend, and Sarah was staying at a friend���s house. In my defense, we aren���t talking about my DNA.

As you might imagine, this incident prompted quite the dinnertime conversation. I pointed out that, in many states, someone with a minimum wage job would need to work two hours to buy the two drinks. I also noted that $16.47 represented 11�� days of Sarah���s pocket money. But mostly, I suggested that it simply isn���t right to have an adult pick up two drinks from Starbucks and then deliver them to two 14-year-olds. Children should not have adults at their beck and call.

Sarah���s response: ���It���s my money.���

We live in a wealthy town just north of New York City. My wife and I joke that we���re in the town���s low-income housing, which would seem even funnier, if you knew how much our apartment cost. Amid this affluence, Sarah���s behavior is no aberration. From what I gather, students regularly call the local pizza parlor from school and have them deliver to the main entrance���even if it���s just a single slice.

All this appalls me���for reasons good and bad. Whenever I go to the grocery store, I���m shocked at the bill. When did everything become so expensive? I���ve self-diagnosed this as ���old people���s disease.���

And my ailment doesn���t stop there: If the cost of living strikes me as expensive, the way people live seems even more extravagant. Who needs those luxury cars, or the latest iPhone, or countless cable channels?

But then I tell myself I���m being silly. Why shouldn���t people live more extravagantly? Inflation-adjusted per-capita GDP is double what it was 41 years ago. We should be living better.

I���m just not sure 14-year-olds should be. When I order pizza to be delivered, I remember being in my 20s���and not ordering pizza, because I couldn���t afford it. That makes today���s pizza taste that much better. There���s nothing like the pleasure of a gradually rising standard of living.

But if you���re 14 and you���re already spending $16.47 to have two specialty drinks delivered, how much better can it get? I fear the good folks at Starbucks have their work cut out for them.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook . ��His most recent articles include Great Debates,��Debtor’s Dozen��and��Here to Retirement. Also check out his new��podcast with Creative Planning’s Peter Mallouk, as well as last week’s��article for Creative, Bet on the Humans.��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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Rewriting the Rules

WHEN POLITICAL parties set aside partisan bickering and agree on an issue, it’s worth taking note. Such was the case last week when the House of Representatives voted 417���3 in favor of a bill known as the SECURE Act. This legislation would represent the most significant set of changes to retirement rules in more than a decade.

Why the sudden bipartisan cooperation? For better or worse, both parties recognize that a growing number of Americans face a retirement crisis. According to Boston College���s Center for Retirement Research, fully half of households are ���at risk��� when it comes to retirement readiness.

The new legislation includes more than a dozen changes, big and small. Below are three provisions that I see as most significant, along with the steps I’d consider if they became law:

1. Expanded coverage. According to Pew Charitable Trusts��� research, more than a third of private sector workers don’t have access to a workplace retirement plan. In most cases, that’s because these plans are costly and complicated to establish, and there are steep penalties for falling out of compliance. The new legislation would include both financial incentives and administrative fixes to ease this burden. That should be good for our collective financial health.

The new rules would also help boost participation rates. Long-term part-time workers could no longer be excluded from company 401(k) plans, as they are now. And employers would be permitted to auto-enroll participants at higher contribution rates. Since the original auto-enrollment rule went into effect in 2006, participation rates have climbed steadily, and research has shown that���once enrolled���people generally continue contributing through thick and thin.

What to do?��If your employer doesn’t currently offer a retirement plan, or if you aren’t permitted to participate, keep an eye on Washington. Assuming these new rules take effect, you may want to lobby your human resources department. Encourage your HR folks to establish a 401(k) and point them toward best practices, such as including low-cost index funds.

2. Death of the stretch. Expanding coverage will result in more workers deferring more income and therefore paying less taxes. To help pay for these measures, the legislation would tighten the rules in other areas���including eliminating the so-called stretch IRA.

What���s the stretch IRA? Suppose you inherit an IRA from a parent. Under the current rules, you���re required to take minimum distributions each year from the IRA. Unless the money���s coming from a Roth, you have to pay taxes on those distributions. But to minimize the tax bite, you���re permitted to stretch out the distributions over the course of your lifetime. This can be an especially valuable benefit if a parent passes away during your peak earning years, when your tax rate is likely at its highest.

But this valuable tax break may soon disappear. The new legislation would significantly limit the timetable for these distributions, forcing IRAs inherited after Dec. 31, 2019, to be liquidated within 10 years.

What to do?��If you have substantial assets���more than you foresee spending during your lifetime���this new 10-year rule may require some serious rethinking of your retirement-income plans. The goal: Limit the overall portion of your IRA that���s lost to taxes���both during your lifetime and after your death.

This is complicated, because it requires estimating not only your own future tax bracket, but also your children’s. One way to hedge your bets: Consider Roth conversions during your lifetime. That would lessen the impact of potentially large required IRA distributions on your children’s tax returns.

Fortunately, the new legislation contains another provision that may facilitate tax-efficient Roth conversions. Under current rules for IRAs that aren’t inherited, you���re required to begin taking distributions��once you reach age 70��. Those distributions boost your taxable income, often making Roth conversions financially unattractive after that age. But under the new rules, you’ll have another few years���until age 72���to begin those distributions. That would widen the window for additional Roth conversions at lower tax rates.

“The disappearance of pensions is, in my view, largely responsible for the retirement crisis we face today.”

Another option: If you have both taxable and tax-deferred assets, you could weight your withdrawals more heavily toward tax-deferred accounts during retirement, so the mix of assets you leave your children includes a smaller embedded tax bill. Under current rules, if you bequeath taxable account investments with large unrealized capital gains, that potential tax bill disappears���thanks to the step-up in cost basis upon death.

A final option: If you have charitable intentions, you can make qualified charitable distributions from your IRA once you get into your 70s and beyond. Now that 2017���s tax law has limited many people’s ability to itemize deductions, this may be an appealing strategy that���ll allow you to help your favorite charities, while reducing your taxable income today and leaving less traditional IRA assets to your heirs.

3. Greater access to annuities. The new rules would make it easier for employers to add annuities to their retirement plan���s menu of investment options. In addition, the new law would provide portability for these annuities, as an employee moved from job to job. Taken together, these new provisions would effectively allow workers to create their own personal pensions.

This is potentially very positive, because it would restore retirement���s traditional three-legged stool: Social Security, savings and a pension. For years, that was the recipe for a secure retirement. But in the 1980s, companies began phasing out pensions in favor of 401(k)s. The disappearance of pensions is, in my view, largely responsible for the retirement crisis we face today.

But will the availability of annuities be a plus for retirement savers? They���re a controversial investment, for two reasons. First, depending on the type of annuity, they may require you to roll the dice on your own longevity. Unlike typical 401(k) investments, you can’t leave an income annuity to your children (though they usually have a survivorship option for spouses). This prospect of losing a lifetime of savings is one big reason annuities can be unattractive. Second, annuities can be weighed down by layers of opaque fees. And the reason they���re so opaque? Because often those fees are unreasonably high.

What to do?��If you have substantial assets, the right answer may be to simply ignore the new annuity option. But you shouldn’t be too quick to write it off. It���s possible that the legislation will spark a round of innovation in the annuity market and perhaps lead to lower-cost, higher quality offerings. If that���s the case, it might be worth allocating a portion of your annual savings to an annuity.

In fact, you could use another of the new law’s provisions to help guide your decision. In the House bill, there���s a requirement that retirement plan statements estimate what a worker’s balance might be worth in terms of future monthly payments in retirement. If that projection shows you coming up short with traditional 401(k) investments, you might instead opt for the security of an annuity.

Adam M. Grossman���s previous articles��include Danger Ahead,��Know Doubt��and��Beat the Street . 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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