Jonathan Clements's Blog, page 393

What Matters Most

PABLO PICASSO was one of the most influential, prolific and financially successful artists of the 20th century. Yet, if you had visited his studio at the peak of his career, you might have guessed otherwise: It was a mess and his work schedule was, at best, leisurely.

On a normal day, Picasso would stay in bed all morning and only get to work around 2 p.m. When he did work, according to a biographer, he was surrounded by ���piles of miscellaneous junk��� and an array of animals. In addition to cats and dogs, a miniature monkey named Monina would sit on the artist’s shoulder, stealing his food and smoking his cigarettes.

Why am I talking about Picasso and his odd routine? It holds an important lesson for your personal finances. However unusual Picasso’s routine, the key point is that he��did indeed have��a routine and, because of that, nothing else really mattered. Presumably, Picasso knew how many hours were required to get done what he needed to get done. As a result, if he spent the rest of the day relaxing, it didn’t matter. The mess, the cats, the dogs, Monina���all that was irrelevant.

How does this apply to your finances? Often, folks will ask if I think they���re spending too much in one particular area. Perhaps it���s a seven-figure house, a six-figure car or some other luxury. My response is always the same: If you have a sound underlying structure to your financial routine, then���like Picasso���you don’t need to worry too much about everything else.

In practice, what does this look like? What do I mean by a sound underlying structure?

If you���re in your working years,��the most important thing is to have a savings plan that���ll meet your retirement goals and then reliably sock away that sum each year. While life is full of unknowns, there���s a fairly simple formula to calculate that savings number.

If you have access to a spreadsheet, such as Excel or Google Sheets, use the PMT function. Let���s say you currently have $250,000 saved and expect 5% annual investment returns. If you want to accumulate $1 million by the time you retire in 20 years, this is the formula to determine your annual savings goal:

=PMT(5%,20,-250000,1000000)

If you don’t have a spreadsheet handy, the answer is about $10,000 per year. While nothing is guaranteed, odds are that if you routinely save $10,000 a year, you���ll reach your goal.

This is where Picasso comes in: As long as you maintain that savings routine, nothing else really matters. If you want to buy that expensive car or send your children to a high-priced school, the only litmus test for whether you can ���afford it��� is to ask whether it would impact your ability to continue saving that $10,000 a year. Or, to put it another way, you could afford a lot of disarray in your finances, as long as you maintain this one piece of structure.

If you���re already retired, you can also apply Picasso’s approach. Here the math is a little different: You want to calculate the amount you could safely��withdraw��from your savings each year and still maintain your standard of living throughout retirement.

There���s a number of approaches you could use to estimate this number, including using a spreadsheet or simply adopting a 4% withdrawal rate. But the important point is this: You want to establish a withdrawal routine that���s sustainable. In other words, you want to structure a withdrawal routine that, in all likelihood, won’t result in you outliving your money. And then you need to stick to it. While it sounds like I’m stating the obvious, that last part is key.

If there’s one thing that seems to trip people up, it’s ���one time��� expenses. Everyone has these���a vacation, a new roof, a big tax bill���and often they’re hard to predict. But when designing a retirement withdrawal routine, you need to allow for them in your calculations. That may sound like a tedious task. But if you do that, you’ll likely sleep easier���and you may discover that your finances permit more spending than you expected.

Adam M. Grossman���s previous blogs��include Happy Compromises,��Pushing Prices,��Counting Down��and��Deadly Serious . 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 .

The post What Matters Most appeared first on HumbleDollar.

Just in Case

A YEAR AGO, I was worried about the stock market. Today, I���m concerned about the job market.

In December 2017, I penned an article entitled Best Investment 2018, which turned out to be surprisingly prescient. That wasn���t really my goal. At the time, I was simply pondering rich stock market valuations, tiny bond yields and the new tax law, with its higher standard deduction and limits on itemized deductions. Putting it all together, it struck me that paying down debt���even mortgage debt���seemed like an awfully smart move.

Since then, the S&P 500 has dipped modestly, while reported earnings per share are expected to climb 28% in 2018. The passage of time has done the work usually done by market declines: It���s helped to sharply improve stock market valuations.

A year ago, the S&P 500 companies were trading at 25 times their reported corporate profits for the prior 12 months. Today, that multiple is down to 19.9, based on earnings for the 12 months through 2018’s third quarter from S&P Global. A year from now, that price-earnings multiple could be as low as 17, assuming stocks continue to tread water and earnings come through as expected.

To be sure, stocks remain expensive by historical standards. But that isn���t especially alarming. After all, stocks have been overvalued for much of the past three decades, plus today’s lowly bond yields are hardly a compelling alternative.

And to be sure, 2018���s handsome earnings growth has been fueled by 2017���s corporate tax cut and by continued fat company profit margins. The onetime boost from cutting taxes won���t, of course, be repeated in 2019. But there doesn���t appear to be any immediate risk that the tax cuts will be reversed.

Does that mean the recent market turmoil has run its course? I have no clue. Forecasting short-term market performance is a mug���s game, because it necessitates predicting not just the news, but also how investors will react to that news.

Indeed, when it comes to stocks, I find myself firmly on the fence. On the one hand, we haven���t seen anything that looks like a market bottom. There���s been no revealing of financial excesses, no squeals of economic pain, no horrendous decline in stock prices, no relentless declarations of doom from the pundits. On the other hand, thanks to improved valuations, buying stocks today doesn���t seem nearly as perilous as it did a year ago.

That brings me to the question everybody seems to be asking: Will the economy weaken? The financial markets appear to think so. The stock and bond markets are suggesting that a recession could be in the offing. When I look around, I don���t see many signs of a U.S. economic slowdown. But it���s foolish to argue with the markets, which reflect the collective wisdom of all investors.

If the economy does indeed weaken, the big worry for many families won���t be the stock market. After all, only half of Americans even own stocks and stock funds. Instead, the top concern for most Americans will be the job market.

We���re now at 3.7% unemployment, down from 10% in October 2009. The Federal Reserve expects 2.5% real economic growth in 2019, with unemployment dropping even further, to 3.5%. Let���s hope the Fed is right.

But in case the folks there have it all wrong, there���s good news: You might have 12 months or more to prep your finances for rough times. How come? The stock market is a leading indicator: It starts falling before the economy contracts and it rallies before a recession is over. By contrast, unemployment is a lagging indicator: Companies are slow to shed workers when the economy turns sluggish, though they���re also slow to rehire when economic growth resumes.

Worried you could lose your job in the next economic downturn? The obvious move is to stockpile cash. While that���s prudent, it shouldn���t necessarily be your top priority. Here are seven other things to do now:

Get rid of credit card debt. No matter what happens to the economy, that���s a smart move. What if you later need cash because you got laid off? While not advisable, you can always ���reborrow��� from your credit cards.
Pay off 401(k) loans. If you lose your job, any 401(k) loans must be repaid right away. Don���t have the necessary cash? The unpaid loan becomes a taxable distribution, triggering income taxes and tax penalties.
Keep funding the 401(k), especially if it comes with a matching employer contribution that vests immediately. Even if a bout of unemployment forces you to dip into your retirement account, you���ll likely come out ahead, because the matching contribution you collect could be worth more than any tax penalty you pay. On top of that, you may be able to delay any retirement account withdrawals until the next tax year, when your lack of income puts you in a lower tax bracket.
Fund a Roth rather than a tax-deductible IRA. If you need cash, you can withdraw the dollars you contributed to your Roth with no taxes or penalties owed. Taxes only become an issue if you touch the account���s investment earnings.
Set up a home-equity line of credit. This could provide another source of cash, should you find yourself out of work. One warning: If we get a deep recession, some banks may respond by cutting the size of credit lines, including those already established.
Calculate your fixed living costs, so you know the minimum sum you need to make it through each month. While you���re at it, ponder whether there���s any way to cut those fixed costs. If you don’t have a paycheck coming in, you want to do everything possible to limit the dollars going out.
Think hard before taking on new financial obligations. For instance, you might keep your current car for a few more years. If your job is at risk, this probably isn’t the best time to take on a car loan or use your spare cash to buy a new vehicle. What if you still have money owed on the last car you purchased? If the interest rate is above, say, 4%, you might make extra payments to get the loan paid off sooner.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook . His most recent articles include No Kidding,��Taking Us for Fools,�� The View From Here ��and�� A Little Perspective . Jonathan’s latest book:��From Here to��Financial��Happiness.

The post Just in Case appeared first on HumbleDollar.

Starting Young

I BEGAN WORKING for my father at age 12. He and his brothers run a sign manufacturing business that was co-founded in 1947 by my grandfather. The first few years, I cleaned pickup trucks, swept floors and took out the trash. When I got my driver���s license in high school, I started running errands for the business���better known as a gopher. As a finance major in college, I was able to work my way into the office, completing invoices, writing work orders and balancing the general ledger by hand. The lessons learned as I progressed through different jobs at the business are still valuable to me today.

Got your own business? The opportunity to employ your children is among the many potential benefits���and it isn���t just about developing a work ethic and teaching your kids to earn a dollar. There���s also the possibility of significant tax savings and the chance to get your children started as investors at a young age.

For this strategy to pass muster with the IRS, your children need to perform an actual service to the business and need to be paid a reasonable wage. Most likely, your kids have skills that you can leverage to modernize your business. Social media and online marketing come to mind. Other tasks include administrative or custodial work. Be sure to look up job or hourly rates for their position and document your findings. This will help in the event of an audit.

Intrigued? Use this five-step process to pay your kids for their services, maximize tax benefits and teach valuable investment lessons:

Hire your children to work for you and pay them a fair wage. Ideally, they earn $12,000 or more in a calendar year.
Your children each take 2018���s standard deduction of $12,000 when filing their taxes. This should reduce their taxable income to $0, unless they earn more than the standard deduction. In 2019, the standard deduction rises to $12,200.
The $12,000 or so of tax-free earnings will eventually be sent to two accounts: a Roth IRA and a 529 college savings plan.
In 2018, each child can contribute up to a $5,500 to a Roth IRA, which then grows tax-free. In 2019, the maximum contribution rises to $6,000.
The remaining money will be gifted back to you, so you can make a contribution to their 529 plan. The 529 grows tax-deferred and withdrawals are tax-free when used for qualified higher education expenses.

As an added benefit, the $12,000 or so in wages you pay each child are tax-deductible to the business. This means that you personally avoid having to pay any corporate or income taxes on these dollars.

Your children will be exempt from paying Social Security and Medicare payroll taxes if your business is a sole proprietorship and if they’re under age 18. They are also exempt from payroll taxes if the business is a partnership and the only partners are the children���s parents.

What happens if your business is incorporated? Your children will need to pay payroll taxes like any other employee. But the benefits far outweigh the taxes owed.

Starting in 2018, the Child Tax Credit was increased to $2,000. You can claim the credit on your return, assuming your children continue to meet the requirements to be considered a dependent. If your child earns enough to provide half of their own support, they no longer qualify.

The tax savings for you are nice, but the early start to investing for your children is even better. Take the Roth IRA. Suppose they make contributions of $6,000 a year for six consecutive years. Result? After 45 years, they���d each have $350,000, assuming a 5% inflation-adjusted annual return.

Ross Menke is a certified financial planner and the founder of Lyndale Financial, a fee-only financial planning firm in Nashville, Tennessee. He strives to provide clear and concise advice, so his clients can achieve their life goals. Ross���s previous blogs include Money Date Night, That Extra Step and Keeping It Going. Follow Ross on Twitter @RossVMenke.

The post Starting Young appeared first on HumbleDollar.

Mind the Gap

BACK IN 2002, I was part of a three-person financial analysis team at a major mortgage lender. I was better qualified than my two male colleagues, thanks to my master���s degree and greater years of experience. Imagine my surprise, then, when I compared my performance review with one of my colleagues. I discovered that, while we both received the same rating, he got a year-end bonus and I didn���t.

Like many women, I was aware of the gender pay gap, but thought of it as an abstract idea. The bonus revelation was like a slap in the face.

My manager and I discussed my salary in general, agreeing that I should be paid more, given my education and experience. But agreement isn���t action. Nothing was done. I felt trapped. Back then, I was a single mother and the family���s sole breadwinner. If I made an issue of my compensation, would I be seen as a troublemaker and would there be repercussions? Would I be better off starting over at another company���and would the situation be better elsewhere?

I felt powerless, forced to wait for my compensation to be adjusted. It never happened. After a year and a half, I decided to look for another job and was fortunate to find an opening in a different department.

Chances are, if you are a woman reading this, you���ve faced similar situations where you���ve felt discounted and yet trapped. It���s also likely that, as with me, it wasn���t a onetime event, but a scenario that repeated itself throughout your career.

When you���re a woman, you automatically inherit social and financial disadvantages in our ���equal��� society. No matter how you slice and dice the data, the gender pay gap is real and persistent. In 2017 in the U.S., a woman, on average, earned 80% of a white male���s income.

The gap is so institutionalized that salaries adjust depending on whether an occupation is seen as a ���male job��� or a ���female job.��� Researchers reviewing data from 1950 to 2000 found that when occupations change from male-dominated to female-dominated, average pay drops, even for the men. But when men enter an occupation, pay increases, even for women in that occupation.

The gender pay gap exists across all demographics, in every age group, in all states, in high- and low-paying occupations, and for those with and without advanced degrees. It exists in nearly every line of work, including female-dominated professions like teaching and nursing. The gap is even greater for many women of color: Latina women earn 53% of a comparable white male���s earnings. Asian women fare better, but are still at just 85%.

Women start off with this disadvantage as soon as they enter the workforce, and it grows exponentially throughout their careers. The compounding effect of the pay gap makes it harder for women to get out of poverty. It also makes it harder to��pay off��student loans.

Women experience the negative effects of the pay gap from their very first paycheck to their very last Social Security check. They often need a bigger retirement nest egg, thanks to their longer life expectancy. Yet the career wage gap makes it harder for women to save as much as men do.

Result? Women retire with two-thirds of the money men have, and receive less from Social Security and pensions. White men over 65 have average annual income from Social Security, pension and other sources of $44,000, while white and black women over 65 get by on $23,000 and $21,000, respectively, and Latinas on $15,000. The upshot: Women are 80% more likely to be��impoverished��in retirement.

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 blogs for HumbleDollar were Taking Their Money,��Why Wait and��Won in Translation.

The post Mind the Gap appeared first on HumbleDollar.

Saving Time

WE HUMANS CAN be a bit irrational. We���ll struggle to the bitter end over potential losses of property, whether it���s fretting over investment losers, trying to recover money we���ve lent or wrangling over our parents��� estate. But strangely, when it comes to what may be our most valuable resource���time���we collectively shrug off losses as a mere nothing. That ���mere nothing��� can often have significant financial implications for future monies earned or lost.

Time has specific properties. It is fixed in amount, but the ���expiration date��� is unknown. It is highly perishable. Once used, it cannot be reused. Over the years, our time resource will become less and less, while being cherished more and more. Sadly, we cannot go back and reuse the time we misused previously.

We all have some time waste forced upon us. I���ve been kept waiting by individuals who value their time��but not my time. Others, unwittingly, are just bad judges of time. Many time losses result from inefficient institutional practices, such as legal systems, government bureaucracy, medical care facilities and utility company dealings.

Some time loss is part of everyday life. Examples include traffic jams and airline delays. There are also things that just happen, like plumbing problems, storm damage, medical emergencies and school closings.

Want to make better use of your time? Consider four strategies:

1. Think carefully about time priorities. Try to avoid giving up truly unique opportunities for the more ordinary. To that end, think about which non-selected options would cause greatest remorse in the long run.

2. Develop a plan to maximize the best use of time.��Develop new interests and new expertise. Discover new careers or part-time diversions. Use time to generate new sources of additional income or new ways to reduce expenses.

Improve physical fitness and favor a healthier lifestyle, which will translate to potential savings in future medical expenses, including hospital bills, physician treatments, and time in assisted living facilities and nursing homes. Consider reading both fiction and nonfiction, taking college courses, developing hobbies, joining social and service organizations, and try to get in some truly memorable travel.��Favor more novel, inspiring, educational or just plain relaxing activities.

3. Consider what time is worth to you. Pay for tasks that rob you of valuable time by hiring help in such areas as lawnmowing, housecleaning, household repairs, painting, car washing, leaf raking, tax preparation and so on.

I have adopted a contra-Ben Franklin philosophy of ���don���t do today what you can postpone until tomorrow.��� I���m generally inclined to give preference to something I really wish to do today, rather than use time for some mundane activity that could easily be postponed. With luck, I may even die before I have to do the darn task.

4. Minimize total time wasters. I refuse to stand in line for pretty much anything. I avoid lines for drive-through banks and fast food. I find that just parking the car and walking in can often save time and add a bit of exercise. I also build in a bit of self-defense for possible wait times: I try to bring along a book or magazine, as well as a legal pad for writing down ideas. I also have a specific plan for those habitually late: I build in a lateness cushion. An example: I���ll set a 4:45 pm appointment time when I want a 5 pm face-to-face meeting.

Do I ever make bad use of time? Absolutely. When I look back through my life, I still cringe at those occasions when I used my time on something unimportant, when instead I could have seized the unique opportunity to see Count Basie, Duke Ellington or Jimmy Buffett in concert. I don���t remember what I thought my ���better time option��� was, but I sure remember what I missed.

But there was one instance when the reverse was true. I made the ���wise��� decision to attend the lecture of world-famous inventor-thinker-futurist R. Buckminster Fuller. Bad decision. Yes, he was a genius, but also a terrible lecturer. Finally, I thought of a better use for my time. I walked out of the lecture and joined dozens of other early-departing scholars in going out for a couple of beers.

Dennis E. Quillen is a retired economic geographer and university professor. In addition to blackjack, he loves long-term investing. His previous blogs include Food for Thought,��Cutting the Bonds��and��Bouncing Back.

The post Saving Time appeared first on HumbleDollar.

Heading Home (V)

WITH MY OFFER of $375,000 accepted, I was faced with coming up with $80,000 to cover my 20% down payment and other closing costs. I had additional expenses as well: There was a home inspection, radon test and sewer assessment that all had to be paid for. And because I’d be breaking the lease on my apartment, I would also need an additional $1,800 for that.

Coming up with the first $50,000 was easy. Six years ago, when I got divorced, I walked away with nearly $50,000 from the sale of our home. I invested the money conservatively, because I assumed I’d use it to buy another house one day. I had put $30,000 in inflation-indexed bonds and kept $20,000 in my credit union money-market account.

I had an additional $15,000 in a savings account, but I didn’t want to put all of it toward the down payment. I’ve always had some type of emergency fund and wanted to maintain at least a $5,000 balance to cover any unexpected costs with my new home.

For the remainder of the money, I turned to my investments. In the six years I’d been renting, I had managed to save a large amount of money, which I’d invested in a variety of ways. I had contributed to a Roth IRA every year. I’d also set aside money in a Vanguard brokerage account, where it was invested in a growth stock mutual fund. In addition, I’d been contributing several thousand dollars a year to my pretax retirement account at work.

In deciding which accounts to liquidate, I went first to the Vanguard brokerage account. I’d initially earmarked the money for a future car purchase, but I was willing to use it for the house purchase instead. My 11-year-old Honda CRV has just 104,000 miles on it, so I feel confident it���ll get me through several more years of commuting before I need to replace it.

Next, I withdrew funds from my Roth IRA. But I was careful to take out only the money I’d put in as contributions, leaving all the earnings in the account, so I wouldn’t have to pay any penalties or taxes on the money. I wasn’t excited about tapping my retirement accounts. But because the Roth represented a very small percentage of my overall retirement nest egg, I felt it was a legitimate use of the money.

To pay for the inspections, lease-breaking fee and various costs associated with moving, I temporarily suspended contributions to my employer-based retirement accounts. That increased my net pay enough to cover those expenses.

Will my decision to buy a house pay off financially? I hope so. My mortgage payment is higher than what I was paying in rent, but the pride of homeownership easily compensates. I’d love to see Portland’s home values increase at the same rate as Seattle’s. Between 2012 and 2018, the median sales price for a home in��Seattle��increased an astonishing 93%. If the same thing happened in Portland, my humble ranch house could be worth $700,000 by the time I’m ready to retire.

For now, I enjoy the endless little projects that need to be done and I spend countless hours contemplating how best to upgrade the house without breaking the bank. Whether I ultimately make a profit on my house or not, I’m simply happier being a homeowner again.

Kristine Hayes is a departmental manager at a small, liberal arts college.��This is the final article in Kristine’s series about her recent home purchase. The previous installments were��Heading Home (I), (II),��(III)��and (IV).

The post Heading Home (V) appeared first on HumbleDollar.

Happy Compromises

A LITTLE WHILE back, a friend���let���s call him Paul���recommended a book with an unusual title:��How Not to Die. As you might guess, it���s about health, nutrition and longevity. Since Paul is a cardiologist and knows a thing or two about what can land people in hospital, I took his recommendation seriously and immediately ordered a copy.

When the book arrived, I learned that the prescription for not dying isn���t so simple. In fact, it runs nearly 600 pages. Result: The book sat on my shelf, unopened, for several months.

Recently, though, I was leafing through it and got to a section on soft drinks. The authors’ view was unequivocal: ���They don���t just fail to promote health���they actually seem to promote death.��� As a longtime soda consumer, this caught my attention and motivated me to cut it out of my diet.

This isn’t a story about nutrition, though. I share this because I see an important parallel between health decisions and financial decisions. Why didn’t I open��How Not to Die��for so many months? Because I viewed it as an all-or-nothing proposition: Either I was going to read and accept all 600 pages of its prescriptions, or I wouldn’t open it at all. Yet, when I did open the book, I realized that it was hardly all-or-nothing.

When it comes to financial questions, I suggest looking at it the same way. Don’t worry about answering every question and solving every problem. What’s most important is to avoid becoming paralyzed by indecision. A single step in the right direction is far more valuable than standing still. Below are three common dilemmas that often lead to financial indecision���and how to escape the quicksand:

1. I’ve heard that market timing is a bad idea, but I’m worried about the stock market. What should I do?

Virtually all academic studies agree that market timing is a bad idea. That’s because it’s impossible to predict the myriad political and economic events that can impact the market. But if you’re feeling stuck because you don’t know which way the market is going, there are lots of strategies you can employ.

One is dollar-cost averaging. Suppose you want to buy $10,000 of stocks. With a dollar-cost averaging approach, you might buy $1,000 each month for ten months. This doesn’t guarantee a better result. But it can help minimize regret and may be better than waiting forever on the sidelines.

Another approach is to use decision rules. For example, you might decide to buy more stocks only if the market drops below a specific level. Or, if you have stock options, you might decide to sell a specific number of additional shares only when the price reaches a certain level. These kinds of rules are great because they replace emotion with a mechanical process, ensuring that you follow through.

A third approach, if you can’t ignore your gut feel about the market, is to split the difference and do a small amount of market timing. Cliff Asness, a well-regarded fund manager, refers to this as “sinning a little.” If you time the market with a slice of your portfolio, it might help or it might hurt. The important point: It doesn���t need to be an all-or-nothing decision���which could be extremely damaging.

2. I’m unhappy in my job and want to make a move, but I have a family and don’t want to do something rash.

In his book��Life Is a Startup, University of Southern California professor Noam Wasserman offers a useful framework for making sound career decisions. Borrowing from his research on startup companies and their founders, Wasserman points out that the most successful career moves result when you combine ���the passion of the evangelist with the clear thinking of the analyst.���

In other words, follow your heart, but look before you leap���really��look. To do this, Wasserman advises ���staging��� your dreams. Dip in a toe before jumping headlong. As Wasserman puts it, try to find ways to ���date��� potential opportunities before you commit. This will allow you to avoid getting boxed in by all-or-nothing decisions.

3. My company offers a Roth 401(k). It seems appealing, but my tax rate is very high right now. What should I do?

As I have��pointed out��in the past, the Roth question hinges largely on a relatively simple tax question: Will your tax rate in retirement be higher or lower? If you expect it to be lower, which is often the case, a Roth likely won���t make sense. But there’s a big wrinkle: No one knows what Congress will do with tax rates. With the��trajectory��of government debt, it’s not inconceivable that rates might have to go higher within our lifetimes.

If that were to occur, your tax rate could end up��higher��in retirement, making Roth contributions appealing, even if you���re in a high tax bracket today. My recommendation: Once again, don’t view this as an all-or-nothing decision and don’t view it as permanent. If you want to contribute to a Roth 401(k), you might do so with half your savings���and then mark your calendar to reevaluate the decision each year.

Adam M. Grossman���s previous blogs��include Pushing Prices,��Counting Down��and��Deadly Serious . 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 .

The post Happy Compromises appeared first on HumbleDollar.

Newsletter No. 38

IS THAT BUNDLE of joy really a source of joy? Lots of parents���myself included���think so. But the data suggest otherwise. Numerous academic studies have found that parents tend to be less happy than the childless. The latest HumbleDollar newsletter delves into this thorny issue.

The newsletter also includes our usual list of recent blogs. Our next newsletter���the final one of 2018���is slated for Saturday, Dec. 22.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook . His most recent articles include Taking Us for Fools,�� The View From Here ��and�� A Little Perspective . Jonathan’s latest book:��From Here to��Financial��Happiness.

The post Newsletter No. 38 appeared first on HumbleDollar.

No Kidding

DO CHILDREN BRING happiness? As someone who has invested heavily in small people over the years���I have two children and two stepchildren���I want to believe the answer is ���yes.��� But the evidence suggests otherwise.

This, I realize, is a touchy subject, so let me offer a few crucial caveats before you fire off that fiery email. The studies cited here offer conclusions based on broad averages. Your experience could be entirely different. Moreover, it may be that children give special meaning to our lives, but that isn���t getting captured by the questions that researchers ask.

That said, I think the whole subject of kids and happiness is fascinating, for three reasons. First, it highlights���yet again���how bad we are at figuring out what will make us happy. Prospective parents are convinced children will enrich their lives. The data suggest otherwise.

Second, having kids is a huge investment. Many���and perhaps most���U.S. parents spend more on their children than they end up saving for their own retirement. The Department of Agriculture estimates it costs almost $234,000 for a middle-class family to raise a child through age 17. If the kid goes on to an in-state university, that would add another $85,000 to the tab.

No doubt some parents will bristle at my description of children as a ���huge investment������which brings me to the third reason I���m fascinated by the debate over kids and happiness. Over the years, I���ve discovered there are two groups you never want to argue with.

The first group: Financial salespeople who are handsomely compensated for pushing particular products. The commissions they collect buy their undying loyalty, and they react with outrage whenever anybody questions the virtue of their overpriced merchandise.

Who���s the second group? That would be folks who have made a major decision and then are belatedly confronted with evidence that their choice wasn���t necessarily the right one. I see this with retirees who have already claimed Social Security���and are now told they would have been better off delaying. I see it with folks who lease cars or buy overly large homes. And I see it with parents who are shown the sorry data on children and happiness.

I first came across such data a dozen years ago. An academic paper charted satisfaction with life, as reported by parents who were approaching their first child���s birth. As the happy day got nearer, reported life satisfaction climbed ever higher���only to come crashing down in the years after the birth. By the time the kids were age three or four, both mothers and fathers were reporting life satisfaction that was significantly below their long-term baseline.

“It seems parental happiness has a lot to do with the amount of work and aggravation involved.”

Indeed, countless studies suggest children either don���t have much impact on happiness or the effect is somewhat negative. One study even found that women rated child care 16th��out of 19 daily activities, putting it just above commuting and just below housework.

Are all parents in denial, insisting that their children are their greatest joy, even as they struggle through one miserable day after another? I think not. Rather, it seems parental happiness has a lot to do with the amount of work and aggravation involved. The least happy parents seem to be those who have young children, are young themselves, are raising kids alone or have children with problems.

Older parents, by contrast, report greater happiness. That might be because the parents are more emotionally mature. But it could also reflect their stronger finances: Raising children is less of a financial strain than it is for younger parents.

That brings me to an intriguing study that looked at 22 countries. It found wide disparities in happiness: Parents in Portugal, Hungary, Spain and five other countries were happier than nonparents in those countries. But in the other 14 nations, nonparents were happier. The bad news: The U.S. sat at the bottom of this ranking, just below Ireland and Greece.

What drove differences in national happiness? The study���s authors conclude that the results were heavily influenced by government policies. Parents were happier in those countries with family-friendly laws that mandated such things as paid family leave, subsidized child care, and guaranteed paid sick and vacation days.

In the absence of such policies, you may want to make every effort to get your finances in good shape before you have children, so their arrival doesn���t prove too much of a financial strain. You might also consider living closer to family, who could provide invaluable support.

What if you���re an aspiring grandparent? Offering to subsidize your adult child���s growing family may get you the grandchildren you want. I realize that might sound crass, but it could be a great investment. While the research suggests having children is a mixed blessing, there doesn���t seem to be much doubt about grandchildren: They���re a huge boost to happiness.

Latest Blogs

Looking to get your finances in shape before year-end? Adam Grossman suggests seven things to do now.
“We helped an investor who had 45 different mutual funds,” recounts Tony Isola. “Every quarter, they were all sold and replaced with new products as part of some insane strategy.”
Want long-term financial success? Ross Menke��pounds the��table for three principles: bring stability to your income, increase��savings over time and take care of your health.
Yes, you can earn an average income and still amass $3 million by retirement. John Lim explains how.
Need to take required minimum distributions from your IRA and 401(k) by year-end? You might want to start now���because it could take that long to get your recordkeeper to act, says��Richard Quinn.
“It���s a relief to go from guessing my cash flow to having a good idea of what will be left at the end of two weeks,” writes Lucinda Karter.��“I know how generous a person I can be, which���alas���isn���t as generous as I once thought.”
November’s most popular blogs were devoted to the slumping stock market. But those weren’t the only articles that caught the attention of HumbleDollar���s readers.
Aiming to trim your taxes? “This is the time of year to act or not act���depending on whether you think your tax bracket will be higher or lower in 2019,” advises Julian Block.
Wall Street makes good money if it can persuade everyday investors that they’re clueless���and yet it’s the “professionals” who are failing to act like long-term investors.
“What you teach your children through your actions could be with them for their entire life,” writes Dennis Friedman. “Tempted to overspend on a luxury item? Just remember, your children are watching.”
Have you built up a hefty nest egg that you hope to pass to the next generation? To make sure they’re ready,��Ross Menke��suggests four steps.
Feel like stock prices are jumping around too much? Adam Grossman fingers a likely culprit: momentum investors.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook . His most recent articles include Taking Us for Fools,�� The View From Here ��and�� A Little Perspective . Jonathan’s latest book:��From Here to��Financial��Happiness.

The post No Kidding appeared first on HumbleDollar.

Now or Later?

WANT TO CUT your tax bill for this year and next? The main thing is to act���or not act���before Dec. 31, while there���s still time to take advantage of tax angles that can generate dramatic savings.

Once we���re beyond Dec. 31, it���s generally too late to do anything but file Form 1040 on the basis of what took place the preceding year. There are a few exceptions. For instance, in early 2019, you can still make deductible contribu��tions to some tax-deferred retirement accounts, such as traditional IRAs, SEPs (simplified employee pension plans) and other plans that reduce taxes for the prior year.

What should you do before year-end? There���s the obvious: Aim to make maximum contributions to your employer���s 401(k) or 403(b) plan. But you should also think about whether your tax bracket will be higher or lower in 2019���and hence whether you want to shift taxable income or deductions into next year or generate them in 2018.

Consider an example. The law allows individuals who buy EE savings bonds to postpone reporting the interest income until they cash in the bonds or the bonds mature. The interest is also exempt from state taxes���a real advantage for those in high-tax states like California, Connecticut, Hawaii, Massachusetts, New Jersey, New York, Oregon, Rhode Island and Vermont.

This option to defer provides savings bond owners with some valuable leeway in reporting their interest. With careful planning, the deferral can become the equivalent of an exemption from taxes.

Let���s say middle-incomers Joe and Josephine Seispack expect to fall from the 22% bracket for 2018 (taxable income between $77,400 and $165,000) to the 12% bracket for 2019 (taxable income between $19,400 and $78,900). Why the descent to a lower bracket in 2019? Joe or Josephine might no longer moonlight at a second job, or perhaps they decide to take early retirement.

The Seispacks tell me that they intend to redeem some EEs and use the accumulated interest for their spring vacation. I remind them that when��they redeem hurts or helps. Suppose they pay no attention to the calendar and remove $5,000 of the accumulation before Dec. 31. The IRS takes $1,100���or 22%���and the couple keeps $3,900. What if they bide their time until after Dec. 31? The IRS���s share decreases to $600, or 12%, and their vacation kitty increases to $4,400.

Timing the sale of savings bonds is just the beginning. There���s a host of ways to shift taxable income from one year to the next. Got a winning stock you want to sell or a tax loss you want to realize? Contemplating a large charitable contribution? Are you a freelancer who plans to buy a new laptop that���ll count as a deductible business expense? Do you have customers you need to bill? This is the time of year to act or not act���depending on whether you think your tax bracket will be higher or lower in 2019.

Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator). His previous blogs include Good Old Days, Two’s a Crowd and Stepping Up. Information about his books is available at JulianBlockTaxExpert.com. Follow�� Julian on Twitter��@BlockJulian.

The post Now or Later? appeared first on HumbleDollar.