Jonathan Clements's Blog, page 383

Why Wait?

MY MOTHER-IN-LAW Doris passed away last year at age 90. In the last few years of her life, she often mentioned that she felt guilty spending any of her money, let alone splurging. She wanted to leave the money to her children, even when her children kept telling her to spend, splurge and enjoy the last few years of her life.

Doris didn’t want to worry about her investments. Like a lot of people, she entrusted her money to a nationally known financial company. Unfortunately, the company, like many name-brand money managers, charged an asset under management (AUM) fee above 1%, which I considered high for investing her money in relatively simple index funds. Although she had a good portion invested in stocks, the return she received after the AUM fee was much lower than the return she could have enjoyed with index funds held at a low-fee company like Charles Schwab or Vanguard Group. Doris, however, didn’t want to think about it too much and just assumed that the big name meant best management.

Result: Even though Doris thought she was saving money and doing the best for her children, she was unnecessarily wasting part of their inheritance by overpaying for money management.

After going through my mother-in-law’s passing, and the accounting and disposition of her estate, I started to think about how my husband and I could best handle our estate. I wanted to avoid or minimize Doris’s two issues: being afraid to spend our retirement money and wasting the estate by having it held by a company with high fees. When I came across M1 Finance, with its no-fee, fractional, automated investing, it struck me that I had found my solution.

We have two sons, ages 22 and 23, both recent college graduates, who have just started their first jobs. Both seem to be on track for good careers—one’s a software developer and the other’s an actuary—so they have no immediate need of financial assistance. My husband and I are 57 and 53, and we were fortunate to be able to retire early. We know we have many years ahead of us. But at the same time, we want to leave something behind for our sons.

The upshot: I front-loaded our sons’ inheritance by setting up Roth IRAs for both of them. We contributed the maximum to their accounts this year and plan to continue contributing for the next few years. We asked them not to touch the money until they reach retirement age.

Generally, I believe in owning a broadly diversified portfolio. My husband and I are invested in all the major stock market sectors, both in the U.S. and internationally, and we also own bonds. Our sons, however, are much younger, with a far longer time horizon. I decided to invest 100% in stocks, divided between exchange-traded index funds focused on U.S. and international small-cap value stocks. This has the potential to give their portfolios’ growth an added boost. Academic research suggests both small-cap stocks and value stocks tend to generate superior returns.

We stressed to them that they should continue to contribute the maximum to their employer’s 401(k) and that the Roth IRAs we set up should only be a small part of their total savings.

Front-loading their inheritance with M1 has five advantages:

We’re now free to spend our money without guilt or worry that there will be nothing left for our kids.
There’s no commission and no AUM fee, except the annual expenses charged by the ETFs we selected, so the money can grow faster.
M1 makes it easy to see when it’s time to rebalance.
Our sons shouldn’t have to pay taxes on the earnings from their Roth IRAs, provided they wait until after age 59½ to withdraw those earnings.
They can easily manage their finances, even though they aren’t savvy investors. All of this should require very little time and attention from our sons, allowing them to focus on their chosen careers.

This plan requires lots of faith and patience over several decades. While no one can control the return on the investments or how the market will perform over the decades ahead, we hope to take advantage of long-term growth and, at the very least, avoid wasting money by paying unnecessary management fees for minimal actual management.

We also hope that, by walking our sons through this process, they’ll gain the wisdom that a little oversight and using the right financial firms can make a big difference in the long run. And we won’t charge them a fee for that lesson.

Jiab Wasserman recently retired at age 53 from her job as a financial analyst at a large bank.  She and her husband, a retired high school teacher, currently live in Granada, Spain, and blog about financial and other aspects of retirement—as well as about relocating to another country—at YourThirdLife.com . Her previous blog for HumbleDollar was Won in Translation.

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Creative Destruction

MY FIRST JOB was in 1963, at age 12, delivering newspapers for the Los Angeles Herald Examiner. There must have been at least five children from my neighborhood who were newspaper carriers. Today, you rarely see anyone delivering newspapers. The Herald Examiner went out of business in 1989.

My next job, as a teenager, was working at a machine shop that made tools for aerospace companies, such as McDonnell Douglas and Rockwell North American. The machine shop is long gone and so are many of the companies it served.

After I graduated from high school, I worked for an advertising company that made merchandise catalogs for department stores. Some of our customers were Buffums, May Company and Gottschalks. All three stores are no longer in business. Ditto for the advertising company that employed me.

When I was in college, I worked for Fedco, a regional membership department store in Southern California. It filed for bankruptcy in 1999, unable to compete with national chains such as Target and Walmart.

After college, my first job was at Hughes Aircraft Company. I worked in the Microwave Product Division that built microwave transmitters and receivers for cable television operators. The product line eventually closed down because of competition from Direct TV and new fiber optics technology.

Before I retired, I worked for a satellite company that was later sold to Boeing. It can take many years to build and launch a satellite because of the long lead times involved in the manufacturing process. As a result, by the time a satellite was launched, some of the technology was already obsolete.

Have you ever heard the phrase “creative destruction”? Joseph Schumpeter used the term in his 1942 book Capitalism, Socialism and Democracy, where he describes the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

The smart phone is an example of creative destruction: It destroyed the market for older cell phones, MP3 players, calculators, voice recorders, point-and-shoot cameras, personal digital assistants and wrist watches. Netflix disrupted the video rental business. It was instrumental in Blockbuster closing its 9,094 stores worldwide and filing for bankruptcy protection, proving that the “too big to fail” model doesn’t protect you from the process of creative destruction.

This relentless process explains why a significant part of my job history has been erased. The companies I was involved with, in my early life, were replaced by new companies that were more adept at producing the goods and services that society wants.

Sometimes, entire industries are turned upside down. The old coal industry is losing out to cleaner, cheaper and abundant natural gas created by the shale gas revolution. But that doesn’t mean that natural gas will be the long-term winner. Renewable wind and solar energy industries could eventually challenge natural gas.

Creative destruction also has an effect on workers. Old jobs are replaced by something new—and it isn’t necessarily new jobs: It could be new technology replacing an old job. Over the past 20 years, we have seen plenty of blue collar jobs in automotive manufacturing and customer service replaced by automation. We have already had a glimpse of the future with self-driving cars. Taxi and commercial truck drivers will inevitably be affected.

White collar jobs are also impacted. The work of pharmacists, attorneys and journalists is already being transformed by automation. Pharmacies and hospitals are using automated medication dispensing machines. Attorneys are using artificial intelligence to do document reviews. Media stories about business and politics are being written using computer algorithms.

Why is creative destruction important to an investor? It drives economic growth by creating new technology and production processes. That, in turn, results in the better products and services that are sought after by customers. This constant upheaval, with new businesses replacing old, creates a vibrant economy that should enrich investors.

Problem is, amid the gales of creative destruction, it’s hard to know which companies will survive and thrive. One indication: Among the almost 26,000 companies that have traded on the U.S. stock market over the past nine decades, just 36 were in existence for the entire period. Forget trying to guess which companies will be dominant in future. Instead, to reap the rewards of creative destruction, your best bet is own all companies—by investing in total market index funds.

Dennis Friedman retired at age 58 from Boeing Aerospace Company. He enjoys reading and writing about personal finance. His previous blogs include Taking Inventory, A Word of Advice, Lucky One and Friendly Reminder.

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Food for Thought

WHILE DINING recently at my favorite restaurant, I focused on my food order. But I also got to thinking about economic concepts—an occupational hazard for a retired academic.

Opportunity cost hit me almost immediately. When the urge to eat strikes, I cannot consume two meals at two different restaurants at the same time. By selecting “A” over “B,” I’m automatically giving up an experience at “B.” Next, once in my selected spot, I face another—often difficult—decision as to which specific meal I want. I’m often conflicted by menu choices. Opportunity cost again: As delicious as they may be, I cannot eat three or four separate meals.

Demand curves affect patrons in terms of both restaurant and menu selections. The occasion—whether it’s a first date, birthday or anniversary—can make a big difference to the acceptable price range. If you’re dealing with a special occasion, the demand curve tends to be relatively inelastic, meaning you aren’t too sensitive to the meal’s price. For other occasions, the demand curve probably ends up in the moderately elastic range.

Personally, certain entrees can have an almost perfectly inelastic demand curve. Recently, I was dining on one of my favorite foods, Royal Red Shrimp with drawn butter. For me, the demand curve for these seasonal shrimp—which have consistency and taste more like lobster—is essentially perfectly inelastic. Regardless of price, I want them. I’m able to splurge on these occasional inelastic temptations with the money I save utilizing other economic principles.

Such as? I economize by buying items where my demand curve is perfectly elastic, meaning I simply won’t buy if the price is too high. I never purchase two-liter soft drinks unless they’re priced at $1 or less per bottle. By the same token, the reduced prices on “happy hour” bar beverages and restaurant “specials” spur purchases I might otherwise not have made.

I also economize by avoiding luxury goods or (perhaps a better term) snob goods. I can easily say “no” to obscenely priced bourbon shots and $500 bottles of wine.

There are also products and services that I consider bad goods. These are things unwanted at any price. Free isn’t nearly good enough. You’d have to pay me to accept items like dark rum, salmon, liver, butter beans, eggs and overcooked steaks.

Bad goods, for me, can extend to classes of restaurants as well. It’s not unusual for me to totally reject free or discounted buffets, as well as any restaurant offering “home cooking.” I’d rather spend more money at an alternate spot of my choosing.

Restaurants frequently remind me of the concept of diminishing returns. For example, the first sips of beer are the best. Additional sips are progressively less and less rewarding. Too much beer, especially at my age, would not only be “rented,” but also would likely be regretted later. Even very good meals can quickly turn bad if one continues to eat and eat, plus throwing up at a meal’s conclusion isn’t a good way to impress one’s dinner partner.

I find that savings in some areas allow me to spend more on items of high personal value. I use coupons and senior discounts frequently. I’m fond of “happy hour” and “early bird” specials. I look for midweek specials, newspaper and magazine offers, two-for-one deals and the like. What do I do with my savings? I splurge on weekends—preferably on Royal Red Shrimp.

Dennis E. Quillen is a retired economic geographer and university professor. In addition to blackjack, he loves long-term investing. His previous blogs were Cutting the Bonds, Bouncing Back, Starting Over and Getting Comped.

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Taking Care

MY PARENTS were married in 1947 and produced six children over the ensuing 17 years. Dad remained with us, in diminishing health, until 2008. Since then, my siblings and I have been looking after our Mom and her day-to-day needs.

Despite the seemingly endless chaos involved, we have done remarkably well. Here are just six of the things we’ve learned:

1. Your expiration date is unknown.    

When observing longevity in our family over several generations, they’re seemed to be a lot of expirations around age 80, with a hard cap just south of 90. Mom sailed past 90 a few years ago and remains in good health. Her brother-in-law, also a nonagenarian, plays softball in the summer and ice skates in the winter. While rough estimates can be made, there is simply no reliable way to predict these things. Unless you have some special revelation in this regard, I would suggest adding 10 years to your initial financial planning assumptions.

2. Your future income needs are unknown. 

In terms of assets, Mom has her home—the second of two she and Dad built together—and an exceedingly modest Railroad Retirement pension. That’s it. The pension just about covered her nondiscretionary expenses when Dad died. Over the past 10 years, rising costs has reduced that coverage to about 80%.

Mom is blessed with children that are willing and able to cover the shortfall. Otherwise, hard decisions would need to be made. Even the house, while providing shelter, comfort and memories, requires the attention and money that all houses do. We may eventually need the equity therein as a financial resource.

My advice: Assume—because one must assume—that you’ll need far more resources than you expect. Then start saving. Now.

3. Your future caregivers are unknown.

While her remaining children and grandchildren all contribute to Mom’s care, death and divorce have had an impact on her inner circle of caregivers. Dad had the notion that, whatever the need, we would always have more than enough volunteers for everything.

But the fact is, when needs arise, someone has to disrupt some other portion of their life to meet them. As you age, you’re going to need more help than you can imagine. Become aware of your resources. Make friends before you need them. Be good company for those around you.

4. Many hands make for light work and more disagreements. 

Family dynamics will be either an important source of mutual support or an irremediable impediment—but, most likely, some ratio thereof. Not everyone is willing or able to contribute in every way. Opinions about the best course of care will differ. Feathers will ruffle and fuses will get short. Everyone will reach the end of their tether at some point. Expect it. Don’t stop talking to those with whom you disagree. As best you’re able, promote healthy relationships among your family members, especially if you’re the one receiving help. They are going to need each other to take care of you.

5. Your family, if you have one, may not be a bottomless resource.

It’s really hard to quantify the market value, or even the net cost, of the goods and services we provide to Mom, but I suspect I would be astonished by the calculation. I don’t know how Mom would manage without her family. That said, we are all volunteers with our own weaknesses and limitations.

Assume that your family, however generous, may not always be able or willing to help you. Financial resources, if you have them, may provide helpful options.

6. Nothing (good or bad) lasts forever.    

How long can we keep this up? I have no idea. In the best case, the rare periods of respite and grace are bound to get shorter, as the frequency and intensity of our efforts increase. In the worst case, we are one wretched phone call away from a complete disruption of our very tenuous balance. As you plan for the unknowable, keep in mind the words of Michael McGriffy: “Blessed are the flexible, for they shall not be bent out of shape.”

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 blogs include Twelve Rules, Got to Believe and No Exit . You can contact Phil via LinkedIn .

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Seeking Zero

WHAT’S YOUR favorite tax rate? This isn’t meant to be a trick question. If you’re like most people, your favorite rate is probably zero.

While a 0% tax rate is great, it isn’t easy to achieve. There’s just a handful of ways to create tax-free income. If you have young children, 529 accounts are a great option. If you earn a high income, you might buy tax-exempt municipal bonds.

And, of course, there are Roth IRAs. In my opinion, they’re the best, most flexible and most effective tool to generate tax-free income when you reach retirement. As with all good things, the IRS limits taxpayers’ ability to use Roth accounts. Each of the three primary ways to fund a Roth carries limitations.

First, you could make regular annual contributions to a Roth IRA. Problem is, there are income thresholds. Individuals earning more than $135,000 and couples earning more than $199,000 are ineligible to contribute to Roth IRAs in 2018. Even if you can get your income under these thresholds, contributions are limited this year to $5,500 per person, or $6,500 if you’re age 50 or older.

Second, you may have a Roth 401(k) option at work. Unfortunately, this feature isn’t universally available. And if you go that route, you lose the valuable tax deduction associated with traditional 401(k) contributions.

Third, you can move money into a Roth IRA by converting a traditional IRA. But that entails the difficult decision to accelerate payment of a potentially large tax bill.

The result is that many people look at Roth accounts—with their zero tax rate on withdrawals—as a sort of promised land. They like the idea, but they find it hard to make significant contributions.

That’s why I’d like to introduce you to a fourth method—one that isn’t widely discussed—that could allow you to make far larger Roth contributions. The technique involves making after-tax contributions to your 401(k). Here’s how it works:

Step 1: Contact your employer and ask whether your plan will permit after-tax contributions in excess of the usual $18,500 pre-tax limit. If so, ask for information on how to set it up.

Step 2: Decide how much you want to contribute from each paycheck. In general, the total amount that can go into your 401(k), including both employee and employer contributions, is $55,000 per year. Even if your employer offers a generous match, that may still leave quite a bit of room to make additional contributions before hitting that ceiling.

Suppose you make the maximum contribution of $18,500 and your employer’s match adds another $10,000. That would bring the total contribution to $28,500, allowing you to contribute another $26,500 on an after-tax basis, assuming you have the funds available. The amounts are potentially even larger if you’re age 50 or older.

Step 3: When you retire or leave your employer, you’ll request two separate rollover checks. One check, representing your pre-tax contributions and all of the account’s investment growth, will go to your traditional IRA—the same thing that would happen with an ordinary 401(k) rollover. The other check, representing your after-tax contributions, can go into your Roth IRA.

If your retirement plan administrator permits it, this approach may allow you to contribute far more to a Roth IRA than you could using any other method. Moreover, this strategy doesn’t preclude other options, like making regular annual Roth IRA contributions.

Since this strategy is fairly new, I recommend the following “belt and suspenders” steps to ensure that it goes smoothly:

1. Consult your accountant in advance. The IRS approved this strategy relatively recently, so you want to be sure your CPA is aware of what you’re doing and agrees that it makes sense in the context of your overall tax picture. If your accountant is not familiar with it, you can refer him or her to IRS Notice 2014-54, “Guidance on Allocation of After-Tax Amounts to Rollovers.”

2. Keep good records. When you employ this technique, your after-tax contributions will be mixed in with your standard pre-tax contributions. Your plan’s administrator will be responsible for tracking them separately, but it doesn’t hurt to maintain your own records.

3. When you retire or leave your employer, speak with your plan administrator well in advance of initiating a rollover. Remind the administrator that your balance includes both pre-tax and after-tax contributions to ensure that the firm correctly issues two checks. At the beginning of the following year, make sure you receive two separate 1099-R forms, one for each rollover.

Adam M. Grossman’s previous blogs include Garbage In, All Too Human, Stepping Back and When to Roth . 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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Closet Saver

LATE LAST YEAR, The New York Times published an article by Ann Patchett headlined “My Year of No Shopping.” In it, Patchett describes not buying clothing and electronics for one year. I was intrigued—and inspired.

Ever since I collected my first paycheck, I’ve loved to buy clothes and shoes, especially for my twice annual business trips to Europe. I always felt lacking in elegance compared to my clients there. That was how I justified finding new outfits for nearly every day of each trip. It gave me a confidence boost to walk into their offices feeling fashionable and chic.

But my weakness for new clothes was also hugely expensive. Inspired by the Patchett piece, I decided that, as of Jan. 1, 2018, I would try the same experiment and not buy any new clothes, handbags or shoes for one year. I left one loophole open: I would allow myself to buy such items when on vacation.

As Patchett had suggested, it was far easier to choose a few things to stop spending on, rather than adopt a draconian regime of no spending other than essentials. Ten months into the year, how am I doing? For the most part, I did manage to stop buying clothes, shoes and handbags. The leadup to vacations was tricky, as I sometimes needed an extra item specifically for the trip. We travelled to warmer weather in early spring and I realized I had thrown out all my ratty T-shirts the summer before, so I allowed myself to buy a few of those. Having spent to prepare for the trip, I spent almost nothing while on vacation.

Our other big trip this year was to Europe. Before leaving, I bought some shoes I would need for hiking in hot weather. I also purchased a summer raincoat for the drizzle I expected in England and France, but which never materialized.

During the trip, I purchased a few items of clothing, including a Panama hat. Everywhere we went in France, we saw snappily dressed men and women wearing fancy cloth Panama hats. One afternoon, in a store in Granville, I caved and forked over $75. Three days later, I spilt coffee on the hat. My attempt to clean it left the hat misshapen and discolored. For the rest of the trip, it was a potent reminder of my impulsiveness.

Despite the hat, it’s been a good year. I haven’t calculated how much I’ve saved so far, but it’s substantial. And with the money saved has come a greater sense of control and peace of mind.

It’s also made me thoughtful when spending on other items. A case in point: lipsticks, which can cost $20 or more each and which are another weakness of mine. I’m always hunting for that perfect shade. My latest resolution: Only replenish the one color I’ve found that works with every outfit.

What about all the clothing I’ve accumulated over the years? That’s my next project. I’m going to attack my closet, see what I actually wear and try to sell the rest on eBay. A frugal friend of mine does that. She says it’s amazing what sells.

I can’t wait to have a closet filled with only the things I wear. My hope: If I can see better the clothes that I have and like, maybe I’ll feel less deprived—and less tempted to spend.

Lucinda Karter is a literary agent in New York. She’s a fan of Pilates, tennis and Jonathan Clements—but she has to say that, because she’s married to him.

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Newsletter No. 35

WE CAN’T STOP the stock market from correcting, but we can make sure we’re investing right. To that end, I pulled together a special newsletter devoted to the current market swoon. Want to make sure your finances are ready for a bear market? The newsletter offers three quick calculations that may either spur you to action—or bring you peace of mind.

The newsletter also includes a rundown of the past week’s blogs, plus details of a special offer from publisher Harriman House, in case you want to buy the new international edition of How to Think About Money.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . His other new book, From Here to Financial Happiness , can now be ordered from  Amazon  and Barnes & Noble . Jonathan’s most recent articles include Ignore the Signs, Thinking About Money,  The Other Half  and A Good Life .

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Warning Shot

RECENT MARKET turbulence, including today’s sharp stock market drop, has been a wakeup call for many investors. Feeling queasy? It isn’t too late to make portfolio changes: The S&P 500 may be down 9% from its all-time high, but it’s still up an eye-popping 293% since March 2009.

Here are three quick calculations that might spur you to action—or help ease your mind:

1. How much cash do you need from your portfolio over the next five years?

If this is the start of a bear market—and that’s a big “if”—the decline and subsequent recovery will likely all be over within five years or so. Consider an extreme example: Let’s say you bought the S&P 500 stocks on Oct. 9, 2007, just as 2007-09’s horrendous 57% decline was beginning. By March 28, 2013, you would have been back to even—and the recovery time was even shorter, if you count the dividends you would have collected over the intervening five-and-a-half years.

The implication: If you’ll need money from your portfolio over the next five years, it should be out of stocks and stashed in a savings account, money market fund, certificates of deposit or short-term bonds. That way, you don’t run the risk of being forced to sell stocks at fire-sale prices.

What about money you’ll need after the five-year mark? History suggests that, if you leave it in stocks and hang tough through any market decline, there’s a good chance you’ll be able to cash out at close to today’s prices and probably pocket handsome gains.

Are you near or in retirement? My hunch: If you do the math, you’ll likely discover you have far more than five years’ worth of portfolio withdrawals in bonds and other conservative investments.

Suppose you need $20,000 in spending money from your portfolio each year, to supplement whatever you get from Social Security and any pension, and you have $250,000 in bonds and other conservative investments. Divide that $250,000 by the $20,000 you need annually. Result: You have 12½ years of portfolio withdrawals hiding out in conservative investments—a comforting thought and yet another reason to turn off CNBC.

2. What’s the value below which you never want your portfolio to fall?

Think of this as your “freak out” point. You may be that rare fearless investor who doesn’t have one. But many folks do: If their short-term losses are severe enough, there’s a chance they’ll lose all stomach for risk. At that juncture, many folks simply freeze, neither seizing the buying opportunity nor selling in a panic. But others start making drastic and damaging portfolio changes.

The truth is, unless you’ve been through a bear market or two, you probably don’t know whether you have a breaking point or what it is. But the following exercise may help.

Let’s say your investment portfolio is currently worth $500,000 and you’d be devastated to see it fall below $400,000, equal to a $100,000 loss. In a bear market—defined as a stock market drop of 20% or more—the average decline is around 35%.

If your stocks tumbled 35% and you wanted to limit your total dollar loss to $100,000, how much should you allocate to stocks? If you divide $100,000 by 0.35, you have your answer: $285,700. In other words, if you had $285,700—or 57%—of your $500,000 in stocks, and share prices fell 35%, your overall portfolio’s value wouldn’t fall below $400,000.

To be sure, the decline could be worse than 35%, as it was in 2007-09. If you’re really nervous, you could adjust the above calculation to assume a larger drop. But whatever you do, give some thought to your “freak out” point—and think about it in dollars, not percentages, because that’ll make the potential financial pain seem far more real.

3. How much will you save in the years ahead?

If you’re retired, a bear market doesn’t offer much reason for cheer. Yes, you could take advantage by shifting money from bonds to stocks. But even if you courageously rebalance, the potential performance boost is relatively modest.

By contrast, if you’re still in the workforce and saving regularly, a bear market could prove to be a great moneymaker. Instead of pulling money from your portfolio, you’re adding new cash—and a bear market offers the chance to invest that cash at bargain prices.

True, if you’re still working, you likely have a far more aggressive asset allocation than those who are retired. You might be 80% or 90% in stocks, while retirees might be at 50% or 60%. That means a bear market will hit your portfolio far harder than it hits most retirees.

Or maybe not. If you factor in the savings you’ll add to your portfolio in the years ahead, your asset allocation could be more conservative than that of a retiree. Suppose you’re age 40, with a $300,000 portfolio, all of it in stocks. Let’s also suppose you make $100,000 a year, save 15% of your income and plan to retire at age 65.

Run the numbers and you’ll find that, every year for the next 25 years, you’ll add $15,000 in new savings to your financial accounts, for a total of $375,000. Think of those future savings as cash sitting in your portfolio. The upshot: You effectively have a $675,000 nest egg, with 44% in stocks and 56% in cash. That’s a heap of cash that could eventually be invested in stocks. Which raises the question: Should you be fearful of a market decline—or praying it happens?

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New and Improved

WANT A COPY of the new international edition of How to Think About Money? You can purchase it directly from the U.K. publisher, Harriman House, for £12.99, equal to around $17.

Problem is, if you’re outside the U.K., Harriman will likely charge you £4.50 for international shipping. To offset that cost, I asked Harriman for a special discount for HumbleDollar readers. If you buy from the Harriman website, you can use this promo code during checkout: H2TAMoffer. That’ll save you £4.50. The promo code is good through Nov. 5.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . His other new book, From Here to Financial Happiness , can now be ordered from  Amazon  and Barnes & Noble . Jonathan’s most recent articles include Ignore the Signs, Thinking About Money,  The Other Half  and A Good Life .

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Time to Choose

IT’S OPEN ENROLLMENT season for many employer health plans, Medicare and plans offered through the health care exchanges. The window of opportunity can range from a few weeks to perhaps a month.

Sadly, in my experience, most people wait until the last day or two and then make a quick decision. Even worse, they ignore the communications they receive and make no decision, leaving in place for another year the coverage they currently have. This can be a big mistake.

Every year, plan provisions change, prices change, family circumstances change and health status can change. It’s essential to take the time to assess what coverage is best for the year ahead. Here are 10 tips:

1. Look at what you and family members actually spent on health care this year. Is there any reason to believe it will be different in 2019?

2. Do you have a chronic condition with predictable expenses each year? That’ll heavily influence the plan you choose, including which doctors it allows access to and how large your out-of-pocket costs could be. It should also guide how much you stash in any flexible spending account for medical expenses.

3. Are you aware of upcoming procedures or treatment? You may want to commit to contributing more to your flexible spending account in 2019.

4. Consider how much in out-of-pocket costs you’re willing and able to assume. Then compare that to the copays, deductibles and out-of-pocket maximums on the coverage you’re considering.

5. Look at your coverage options and compare your potential out-of-pocket costs with the premiums you’ll pay each month. You may find the potentially higher out-of-pocket costs on a less expensive policy are offset by the lower monthly premiums—and thus there’s no need to pay the higher premiums for the “best” coverage. Fear of health care costs leads many people to over-insure.

6. Contribute at least some money to a flexible spending account, if it’s available. Sure, there is a “use it or lose it” provision, but few people lose any significant money. As you consider how much to contribute, consider how much you’ve spent on medical expenses this year—and any changes you anticipate for 2019.

7. Seriously consider a high-deductible health plan combined with a health savings account (HSA), especially if there’s an employer contribution. Yes, that high deductible can be scary. But again, consider your health status and the risks you face. The tax advantages of an HSA—coupled with the ability to invest the balance and take it with you, even into retirement—are powerful incentives.

8. Before you jump to a new plan that looks financially attractive, verify that the doctors and health care facilities you want to use are participating in the plan. That means checking with both the plan and your health care providers. And be specific. It isn’t sufficient to ask, “Do you take Blue Cross?” There are many plans offered by each insurer, and a doctor may participate in some and not others. Do not rely on the last list of providers you saw online.

I remember an employee who jumped at a new plan based solely on an attractive premium. When the new coverage went into effect, he had to explain to his wife that she had to change gynecologist and the kids’ pediatrician. He pleaded with me for an enrollment do-over.

9. If you are covered by Medicare and are considering a Medicare Advantage plan—which can be attractive—check out its network of doctors, its prescription drug formulary and what sort of coverage it offers for out-of-network providers, if any.

10. Above all, don’t ignore open enrollment. It may take a few extra minutes to read the communications you receive, but it’s to your benefit. Be warned: It’s rare these days that nothing changes from one year to the next.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous blogs include Reality Check, Under Construction and Mini-Golf, Anyone. Follow Dick on Twitter @QuinnsComments.

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Ignore the Signs?

IF THIS IS THE START of a bear market, share prices have a lot further to fall: The S&P 500 is down just 9.4% from its all-time high—and yet one of the most important lessons may have already been learned.

No, I’m not going to mock those who have lately proclaimed that stocks are the only investment worth owning. I don’t intend to belittle those who assume that U.S. shares can defy investment theory, and somehow be both safer and higher returning than their foreign counterparts. I’m not going to dwell on the silliness of chasing yield with junk bonds, which offer stock-like risk to unsuspecting investors.

I’ll also avoid mentioning the FAANG obsession—Facebook, Amazon, Apple, Netflix and Alphabet’s Google—and its conflating of great companies with great stocks. I’m not even going to rant about bitcoin or hold it up as a leading indicator of the speculative fervor that has recently taken hold of the financial markets.

Instead, the lesson, and the implicit criticism, is directed at myself—and the millions like me—who have been expecting a stock market decline for years. Take my first newsletter, published in September 2015. There, I wrote that “to get enthusiastic about stocks, I’d like to see the S&P 500 off 25% from its high.”

Since then, it’s climbed 36%.

I don’t make short-term market predictions—at least not publicly—and yet I’ve spent the past three years fretting about future stock market returns. That sense of prescience was based on valuations—a seemingly objective, rational reason to worry. U.S. stocks are greatly overvalued if you look at dividend yields, Tobin’s Q, cyclically adjusted price-earnings ratios and many other market yardsticks.

One exception: price-earnings (P/E) ratios based on trailing and forecasted earnings. According to markets.WSJ.com, the S&P 500 is trading at less than 23 times the past year’s reported earnings and at around 17 times expected operating earnings—expensive, but hardly outrageous. Those P/E ratios, however, may be misleading. Why? Corporate earnings have been pumped up by the long economic rebound. If the economy slows and those heady profits slip away, P/E ratios will look far less attractive.

But even if we dismiss today’s P/E ratios as misleading, and we agree that U.S. stocks are indeed overvalued, there’s still a fundamental problem: Valuations tell us nothing about short-run results and surprisingly little about long-run returns.

Consider a 2012 study by Vanguard Group. It analyzed how effective different market indicators—such as dividend yields, the Fed model and P/E ratios—were in explaining subsequent returns. The upshot: None had any success in predicting the market’s short-run results and most did a lousy job of forecasting 10-year after-inflation stock returns. Even the most effective measure, the cyclically adjusted price-earnings (CAPE) ratio, explained just over 40% of 10-year returns.

Moreover, even the much-lauded CAPE seems to have lost its mojo in recent decades, as another Vanguard study noted. The S&P 500’s CAPE ratio has been elevated for much of the past 30 years, and yet that hasn’t stopped the S&P 500 from clocking 10.6% a year, while inflation ran at 2.5%. The Vanguard study argues that today’s heady CAPE ratio looks somewhat less worrisome, once you factor in falling inflation and declining bond yields.

Where does that leave us? Should we simply ignore valuations? Call me stubborn, but I continue to believe that today’s rich valuations mean we’ll get modest returns over the next decade. I could, of course, be wrong. Still, I think it’s prudent for retirement savers to assume low investment returns and sock away extra money to compensate—and I believe it’s wise for retirees to stand ready to cut their spending for a year or two, should the markets go against them.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . His new book, From Here to Financial Happiness , can now be ordered from  Amazon  and Barnes & Noble . Jonathan’s most recent articles include Thinking About Money,  The Other Half ,  A Good Life  and  Jack of Hearts .

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