Jonathan Clements's Blog, page 396

Simple Isn’t Easy

ALLAN ROTH likes to describe himself as argumentative—and, on that score, it’s hard to argue with him. But it’s also hard to argue with the points he makes, because he has this nasty habit of being right.

Roth is the author of How a Second Grader Beats Wall Street, a financial planner who charges by the hour, and a contributor of financial articles to AARP.org, Financial-Planning.com, NextAvenue.org and other sites. I caught up with him last month at the Bogleheads’ conference in Philadelphia. Here are just some of his trenchant comments:

On financial advisors. “Every time a dollar changes hands, there’s a conflict,” Roth contends. That’s clear with commission-charging brokers and insurance agents, who have an incentive to get customers to trade and to buy products that generate the highest commissions.

But as Roth notes, fee-only advisors are also conflicted. If they’re charging, say, 1% of a client’s portfolio, they may advise against paying down debt, because that would reduce the size of the portfolio they manage. They may also advocate complicated strategies simply to justify their own fee. Even hourly advisors, like Roth, have an incentive to string things out, so they can bill for more hours.

On simplicity. “There are so many forces pushing us toward complexity,” he says. It isn’t just advisors looking to justify their fee. Anxious to get published, academics are constantly trying to uncover new factors that explain market returns. Seduced and bullied by yo-yoing markets, investors are forever making portfolio changes.

Roth, by contrast, favors buying and holding a simple three-fund investment mix—a total stock market index fund, a total international stock index fund and a total bond market index fund. But as he points out, “How could an advisor charge even 0.3% to put you in one or three funds, and keep charging you every year to stay the course?”

On active investors. “I love active investors,” Roth says. “I owe my financial future to Jack Bogle—but I also owe it to active investors, because they keep markets efficient.”

On investor behavior. “Minimize expenses and emotions, maximize diversification and discipline” is Roth’s succinct formula for investment success. “It’s easy to say. It’s a lot harder to do.”

He continues: “Indexing is fine for controlling costs. But you can panic just as easily with a broad market index fund as any other investment.” Roth allows that even he had moments of doubt in early 2009, as share prices plunged toward their bear market lows.

“Humans are predictably irrational,” he says. “When stocks drop, I can tell you that people—including financial advisors—will panic. That creates an opportunity for those who can go against the herd.” One way to make money: Regularly rebalance your portfolio, both between stocks and more conservative investments, and within these asset classes. That’ll help you to buy low and sell high.

On the role of bonds. “The purpose of fixed income has never been income,” Roth opines. “The purpose of fixed income is to keep up with inflation and taxes, and to be the stable portion of a portfolio. It’s the shock absorber. It allows you to buy stocks when stocks plunge.”

While many investors are disenchanted with today’s low bond yields, Roth argues they’re better off today than they were in the early 1980s, when high-quality bonds offered double-digit yields. “People may feel better earning a 10% yield when inflation is 12%,” he says. “But they’re better off today earning 3% if inflation is only 2%—and that’s especially true after taxes.”

Despite that, many investors today are shunning high-quality bonds and instead chasing yield with master limited partnerships, high-yield junk bonds and high dividend stocks. “We have such short memories,” he says. “The stuff that blew up in 2008 is the stuff people are now moving toward.”

On dividends. Investors today are disgruntled with not only bond yields, but also stock dividends. But Roth contends that yields are far higher than many investors realize—thanks to stock buybacks. He concedes that corporations buy back their stock “for all the wrong reasons and at the wrong time.”

Still, he says that the true yield on U.S. stocks today may be 4½%, comprised of a 2% cash yield and perhaps 2½% in annual share buybacks. Like a cash dividend, the latter represents money returned to shareholders, who benefit from the shrinking number of shares outstanding.

But what if you want more than 2% in cash from your portfolio each year? Easy, Roth says. Just do a little selling: “It’s more tax-efficient to buy the total market index fund and sell 2½% every year than to buy a high dividend fund.”

The reason: While 100% of a dividend is taxable, less than 100% of a realized capital gain will be taxed, because you’ll have some sort of cost basis on the shares. Moreover, not all dividends qualify for favorable tax treatment (though that’s also true for short-term capital gains). On top of that, you have to pay taxes on your dividends every year, but you can control when you sell your shares—and, in some years, you might choose not to sell, thus sidestepping the capital-gains tax bill.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . His most recent articles include Fanning the Flames, Just Asking, Warning Shot and Ignore the Signs.

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Pillow Talk

WHAT’S IT LIKE to be married to a personal finance expert? Trust me, it isn’t easy—especially if you’re a fiercely independent but less-than-perfect manager of your own money.

Before I met Jonathan, I was a divorcee who hadn’t shared her financial life with anybody for a few years, but who had been bumbling along just fine on her own. When we started dating, we hardly ever spoke about money. The most he knew about my spending habits was that I was very good at justifying purchases, proudly telling him about my latest bargain. I’m a T.J. Maxx-and-thrift-shop kind of person, so that must have reassured him.

Nonetheless, he probably noticed that I visited those outlets perhaps a bit too often. This did not deter him from marrying me. He knew the basics: I wasn’t in debt, my credit score was excellent, and I had been smart and lucky in real estate.

What was in store for us, a couple who were slightly mismatched in the personal finance department? At the beginning of our relationship, I avoided asking for financial advice. That just seemed off limits. I heard him extoll the virtues of various behaviors from time to time, which I’d quietly absorb. I decided to follow his advice about opening a Roth IRA, but didn’t consult him or tell him about it. I just didn’t want our relationship to involve money.

About a year later, I confessed to opening a Roth IRA with Scottrade (now part of TD Ameritrade). He asked me how it was performing. I let him look at the account statement—a huge step for me—and he noted with bemusement that the $1,000 I’d contributed was still sitting in a money market fund and had never been invested. I was embarrassed and followed his advice to roll the Roth over to Fidelity Investments, where my other retirement accounts were. It has since grown and I’m sheepishly grateful.

Once we were married, I opened up a little more, and let him change my investment choices and occasionally rebalance my portfolio. I had total faith in him, of course, but felt a little loss of control. Perhaps sensing my desire to keep our finances separate and private, he didn’t query me very often on how I was doing. All the while, I knew deep down that there was so much I could learn from him, but I wasn’t quite ready.

We’ve now been married for more than four years and have had a few more in-depth conversations about finances, including where we want to live upon retirement, whether we’re on track as a couple, our individual career decisions and how they’ll affect our financial lives, and various ways to cut household spending.

I still rarely ask him for advice, but I think some of his lessons are beginning to sink in. I’m trying to turn myself into a saver, rather than a spender. It isn’t easy, but it is exciting to feel it’s within reach. One of Jonathan’s favorite pieces of advice has begun to stick: “If you have an overwhelming urge to buy something you don’t need, walk out of the store for 10 minutes and see if the moment passes.”

I’m not yet Ms. Thrifty. But I also no longer feel I need to keep my finances to myself—and I realize that, over time, I may adopt some better habits. I think that was my hope all along.

Lucinda Karter is a literary agent in New York. Her previous blog was Closet Saver. She’s a fan of Pilates, tennis and Jonathan Clements—but she has to say that, because she’s married to him. Follow Lucinda on Twitter @LucindaKarter.

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Taking Their Money

“UNCLE” PHAN, my father’s closest friend and my godfather, committed suicide a few years ago. I regret not seeing him often enough when he was alive and not letting him know how much I appreciated his humor and generosity.

I also regret not knowing his financial and emotional situation.

Uncle Phan retired as a surgeon 20 years ago and took a lump sum distribution instead of a lifetime monthly pension. It should have been enough to last the rest of his life, but he became a victim of financial scams by close relatives and supposed friends. He also suffered depression and it all proved too much for him. At the time of this death, Uncle Phan was penniless and living alone in a small shack.

Earlier this year, my father had a stroke that forced him to shutter his own medical practice. Working with my brothers, we went through his financial records, as we wound down the business. We discovered that he, too, was a victim of financial scams and exploitations that had been going on for years. He had been paying out large sums to current and former employees, each with a sob story of need, including his assistant to whom he had been a mentor.

My father had always been a diligent saver and careful spending. Maybe that’s why we didn’t notice for so long. He was the one who taught his four children to favor saving over thoughtless spending. Yet, in his later years, here he was doling out large sums without thorough recordkeeping and, worse still, without regard to preserving the savings he and my mother needed for the rest of their lives.

Luckily, my parents had a financial backup, in the form of a monthly pension my father continues to receive. My mother also has her own savings from the medical clinic.

Through these experiences, I’ve learned some unfortunate truths:

Studies show that, as we age, our brain becomes less able to detect fraud. Changes occur in the region of the brain that helps us decide whether or not to trust someone.
A majority of financial exploitation is carried out by people the victim knows.
One study found that financial literacy declines by about 2% every year after age 60. Confidence in financial decision making, however, doesn’t decline with age. That combination—reduced ability but continued confidence—helps explain poor financial decisions by older adults.

My father’s and Uncle Phan’s financial decision making had been deteriorating for years. That made them easy targets for their abusers. Perhaps those who took their money weren’t even aware they were asking for money from people with a diminished capacity. I now see that it can happen to anyone, in any family.

In my father’s case, two things helped to lessen the impact of the money squandering. First, while Phan took his pension as a lump sum, my father took his as a lifetime monthly pension. He could only give away what he had on hand, so the financial damage was limited to his past monthly pension payments, while his future distributions remained protected.

Second, while Phan had no children to safeguard him, we were able to catch my father’s spending habits before he made himself and my mother destitute. In the end, there’s no substitute for a family support system.

These experiences have caused me to take precautions now to protect my and my husband’s retirement savings. While we currently manage our own portfolio, I’ve laid out three steps to implement in the next five years:

We’ll arrange to have our money managed by either a low-cost financial company, such as Vanguard Group, or a fee-only financial advisor.
We will build on our already good communication with our adult sons. Today, they have a list of all our financial accounts, in case something happens to us. In future, I want to make sure they are kept apprised of our financial status on an ongoing basis.
We’ll include both our sons in the discussions we will have with our financial advisor, especially when we review our assets and how our annual withdrawals are impacting our portfolio’s likely longevity.

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 were Why Wait and Won in Translation.

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Family Inc.

WHAT’S THE MOST important financial decision you’ll make in your life? Is it when to take Social Security? Choosing the right asset allocation for your investment portfolio? How about the decision to rent or buy a place to live?

I believe that, for many people, it’s who they choose to be their significant other. Together, you’ll decide how you spend your money and how much to set aside for retirement. There will be endless decisions dealing with money—and some will have a huge impact on your financial wellbeing. Your significant other will likely prove to be the most important business partner in your life.

You might ask yourself: What should I look for in a significant other? Is it the person’s character, such as personality and temperament? Is it intellect or earning power? How about the individual’s body language? As George Harrison wrote, “Something in the way she moves attracts me like no other lover.”

It could be that the most important quality is his or her credit score. According to a 2015 study, there’s a correlation between credit scores and the probability of a relationship’s success. The study found that the higher the credit scores at the beginning of a relationship, the lower the chance that a couple would split up. In addition, the closer your credit score is to your partner’s, the greater the likelihood of staying together.

Financial incompatibility is one of the most common reasons for divorce. When one person is a spender and the other is a saver, it’s difficult to reach an agreement on financial goals. If a divorce occurs, this could jeopardize the financial wellbeing of both individuals. Going through a divorce for some people is like starting over financially, because you’re likely to lose 50% of your net worth.

What are some major financial issues a couple might have to navigate during their lives? Having children is a big one. The Department of Agriculture calculates that the cost for a middle-income family to raise a child through age 17 is $233,610. This cost only includes necessities, such as housing, food, child care, transportation and clothing.

According to NerdWallet, “If you choose to provide more expensive essentials and add common perks, you could easily spend over $745,000 from birth to age 18.” Those perks might include private high school, college preparation expenses, music lessons, tutors, laptop, wireless phone, birthday and holiday presents, and vacations.

The costs of raising a child are potentially endless: You can spend as much as you want. As a result, the decision to have children and how much to spend might be a couple’s biggest financial decision during their lifetime.

Another key financial issue: how much debt you each bring to the relationship. Are you willing to be burdened by your partner’s college or credit card debt? If you decide to get married and want to buy a house or car, his or her outstanding debt could have an impact on your ability to get a loan as a couple. Major purchases might have to be made in the individual’s name who has the better credit score. A low credit score can make things less affordable.

Obviously, there are other factors that should be considered when choosing a mate and how many children to have. These decisions shouldn’t be based solely on money. That said, financial compatibility ought to be near the top of your list when seeking a partner. My advice: Do the wise thing—and ask questions about both the financial solvency and goals of your future significant other.

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

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Clueless

I WAS RECENTLY looking at one of those “whatever happened to” top 10 lists. In this case, it was about a select group of celebrities and their money—or lack thereof. The point of the list: All of these people, who had made millions, were broke or worse. Several had filed for bankruptcy more than once. Others were deep in debt and most owed hundreds of thousands to the IRS. One former star, who once earned several million dollars a year, had $5,000 in the bank.

How does that happen? I guess their celebrity status was no guarantee they’d be smart or act responsibly. In some cases, they were duped into poor investments. But the overriding cause of their woes was out-of-control spending, living lavishly during the peak of their stardom with little regard for the future.

Why should we care about these folks? They provide a good learning experience for us mortals, and especially young people who idolize these celebrities and their lifestyles.

Overspending, ignoring future financial needs and not learning to manage money are common failures for many Americans. But why are we surprised? Formal financial education is very limited.

The Council for Economic Education reports that only 17 states require high school students to take a course in personal finance and only 22 require they take a course in economics. Studies have found that, without financial education, students are more likely to end up with low credit scores and other financial problems.

I also question the effectiveness of the formal education that is offered. In an admittedly unscientific study, I recently asked a few teenagers, who had taken high school financial education classes, some basic money questions. They were clueless. To be fair, we’re talking teenagers here, so they were probably distracted by their phones.

But what about adults? Participants in FINRA’s National Financial Capability Study were asked five questions covering relatively common financial issues, such as compounding, inflation, diversification, mortgages, and bond prices and interest rates. The results weren’t encouraging: 63% of participants got three or fewer questions correct.

The evidence overwhelming indicates all too many people aren’t adequately preparing for their future retirement. One study suggests at least 50% of Americans will see their standard of living drop once they retire. Dealing with the present seems beyond the ability of many, so maybe we shouldn’t be surprised they also struggle to save for the future.

Where does all this leave us? We have a population that’s poorly educated in financial and economic matters, older workers who are ill-prepared for retirement, a younger generation saddled with student loans and finding it difficult to control their spending, and a retired generation calling for higher Social Security benefits.

A bailout would seem to be in order. But who’s going to do the bailing?

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

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Five Messy Steps

RECENT WEEKS have been challenging for our country. We’ve seen horrific terrorist attacks. The midterm elections suggest the U.S. is deeply divided. While the economy has been doing well, the stock market has started to wobble. October, in fact, was the market’s worst month since 2011.

For all these reasons, folks have been asking me whether they should steer clear of the stock market for a while, until the dust settles. That sounds sensible—until you realize the difficult steps involved:

Step 1: Predict what’s going to happen and when.

Step 2: Predict the impact of the event on the economy and the financial markets.

Step 3: Take action quickly enough to benefit from what you expect to happen. For example, if you thought particular legislation would result in a stock market decline, you would need to sell your investments before other investors did the same thing and drove prices down ahead of you.

Step 4: Decide when to reverse course. Continuing with the above example, even if you believed that particular legislation would cause the market to drop, presumably you wouldn’t want to stay out of the market forever. When should you buy back in? That’s often the hardest step.

Step 5: Determine whether the event in question would have any long-term impact. For instance, the recently enacted corporate-tax cuts gave a boost to stocks, but they’re also driving up the federal debt more quickly than before. Will that have a negative impact down the road? If so, to what degree and when?

It’s exceedingly difficult to get all five steps right. While it was perhaps an outlier, the 2016 election provides a good example of how hard this can be. In the days leading up to the election, nine out of 10 polls predicted Hillary Clinton would prevail. Among those who hypothesized about Donald Trump winning, many predicted a negative economic outcome. For example, Simon Johnson, a well-respected MIT professor, predicted that if Trump were elected, it would “likely cause the stock market to crash and plunge the world into recession.” Goldman Sachs predicted a 25% crash in the Mexican peso. Others had similarly negative expectations.

What’s actually happened? As you know, the economy is doing well. The stock market has been bumpy recently, but it still stands some 30% above where it was on election day 2016. And the Mexican peso is basically unchanged over that same time period. In short, virtually all the prognosticators were wrong.

To be clear, I’m not disparaging those who failed to see what was going to happen. Rather, I’m simply using them to illustrate how hard it is to make such forecasts. In fact, even those in power have a difficult time predicting how things will go.

Cast your mind back to February of this year. President Trump appointed Jerome Powell to lead the Federal Reserve. But barely eight months later, when the Fed hiked interest rates, causing the stock market to dip, Trump bitterly criticized his own appointee. In an interview, the President complained, “I don’t know what their problem is that they are raising interest rates and it’s ridiculous. The Fed is going loco…. I’m not happy about it.”

What’s the solution? Is there any way to protect yourself from the uncertainties of the stock market? As mundane as it sounds, I think the answer is asset allocation. Since the stock market offers no guarantees, the only way to sidestep that uncertainty is to shield sufficient assets outside of the market—by buying bonds and other conservative investments. In addition, be sure that the assets you do invest in the stock market are adequately diversified. Political events can affect some industries more than others. Diversification gives you a better chance of dampening those effects.

Adam M. Grossman’s previous blogs include Hole Story, Seeking Zero, Garbage In and All Too Human . 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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Newsletter No. 36

IS SAVING MONEY a bad thing? You might conclude that is indeed the case, based on all the criticism that’s recently been directed at the Financial Independence/Retire Early movement, otherwise known as FIRE. I take a look at the controversy in HumbleDollar’s latest newsletter.

The newsletter also includes brief descriptions—and links to—all the blogs that have appeared since the last newsletter. In addition, I’ve included details on how to get signed copies of my latest book, From Here to Financial Happiness. It’s the gift your entire family will be thrilled to receive this holiday season. They just don’t know it yet.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . His most recent articles include Just Asking, Warning Shot and Ignore the Signs.

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Fanning the Flames

WHAT COULD POSSIBLY be wrong with saving like crazy, so you can retire early? That’s the notion behind the Financial Independence/Retire Early, or FIRE, movement. Yet lately, I’ve read a lot of carping about FIRE, both in articles and in the emails I receive.

Just last week, those complaints got yet another airing in The Wall Street Journal. Earlier, Suze Orman weighed in, arguing you need at least $5 million to retire early. “I hate it,” she said of the FIRE movement.

The complaints prompted a recent rejoinder from one of FIRE’s leading evangelists, Mr. Money Mustache. “The whole reason for doing any of this is to lead the happiest, most satisfying life you can possibly lead,” he argues.

Is all the controversy justified? Here are just five of the complaints I’ve heard about the Financial Independence/Retire Early movement:

Quitting the workforce in your 30s or 40s simply isn’t an option for the typical worker. Most of those who retire early had high incomes, allowing them to save great gobs of money during their truncated careers.
Many FIRE adherents are able to retire at a young age either because they avoided the cost of having children—or they hope that, by dropping out of the workforce before their kids reach college age, they’ll get heaps of college aid.
Just as quitting work may boost financial aid eligibility, it can increase the premium subsidies received under the Affordable Care Act. Some FIRE adherents even collect food stamps. That’s led critics to charge that these early retirees are gaming the system, effectively mooching off the rest of us.
The frugality required to retire early is excessive. While most Americans make the mistake of spending too much today while shortchanging tomorrow, FIRE devotees are criticized for being just as foolish—but in the opposite direction: They’re so focused on tomorrow that they constantly defer gratification.
Many of the FIRE movement’s vocal advocates either earn substantial incomes from blogging, writing books and other endeavors, or they have a spouse who still works fulltime. In other words, they really aren’t living off the savings they amassed during extraordinarily brief working careers.

There’s some sliver of truth to these complaints. Still, it feels like a cooked-up controversy. In a country where most people save too little and are pitifully ill-prepared for retirement, should we really be getting worked up over folks who are maybe saving a tad too diligently? Indeed, I’d argue we need more Americans who are willing to sacrifice today so they can have a better tomorrow.

Perhaps I’m sympathetic because I favored the FIRE lifestyle long before it was a thing. Through my initial decades in the workforce, I lived modestly and saved prodigious amounts, so today—in my 50s—I can spend my days as I wish. Maybe more important, the philosophy that underpins the FIRE movement meshes with four key themes I often harp on.

First, forget pursuing your passions in your 20s and 30s. Instead, you should spend those years pursuing dollars, so you can spend your 40s and 50s doing what you love. My contention: Pursing your passions in your 50s will bring greater happiness than endeavoring to do so in your 20s, when you probably don’t really know what you want and when the conventional work world will likely still seem novel and exciting.

Second, the key to financial success is no secret at all: You need great savings habits. By comparison, everything else—investing in stocks for the long haul, favoring low-cost index funds, managing taxes—pales in importance.

That said, one of the key notions that drives the FIRE movement is also propelling the shift from expensive active management to low-cost, tax-efficient indexing. In both cases, folks are focused on cutting out expenditures that bring little or no benefit.

Third, the material goods we hanker after—the bigger house, the faster car, the latest electronic gadget—deliver surprisingly little happiness. If we live more frugally, there’s every likelihood we’ll be just as happy and, I suspect, even happier. The fact is, the thrill from a $35,000 car quickly fades, but the sense of financial security from $35,000 in the bank never grows old.

Finally, there’s often scant relationship between the work we care about and the work that’ll generate the biggest paycheck. To be sure, some folks have jobs that pay them handsome sums while also bringing them great satisfaction. If you’re in that camp, consider yourself extremely lucky.

But for many of us, there’s an inverse relationship: The more dollar income a job generates, the less psychic income we receive. That’s why saving early in adult life is such a smart strategy. By doing so, we can fairly quickly buy ourselves the freedom to spend our days doing what we’re passionate about and what we feel is important, even if that work pays us little or nothing.

Want to make sure you have that sort of financial freedom by the time you’re in your 40s or 50s? Saving like crazy in your 20s and 30s seems like a small price to pay—and it could be one of the wisest investments you’ll ever make.

Holiday Offer

WANT A COPY of From Here to Financial Happiness signed by yours truly? It could be a great holiday gift for a friend or family member—or for yourself. Just follow this simple four-step process:

Email Jonathan(at)JonathanClements.com specifying how many copies you want and what mailing address they should be sent to.
You’ll receive an invoice from PayPal asking for $20 per copy. That $20, which covers the book, shipping and handling, is 33% off the cover price.
Pay the invoice using a credit card, debit card or PayPal. You don’t need a PayPal account to purchase books. Your copies will be shipped once your invoice is paid.
If you want copies for Hanukkah, please pay your invoice by Nov. 15. If you want them for Christmas, please pay by Nov. 30.

Latest Blogs

“I can’t wait to have a closet filled with only the things I wear,” writes Lucinda Karter. “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.”
What caught readers’ attention last month? Check out the seven most popular blogs published by HumbleDollar in October.
“Be concerned when an IRS investigator walks in unannounced at your home or office,” warns Julian Block. “Odds are, that sort of surprise audit means the agency suspects you filed returns that are fraudulent.”
Jiab Wasserman front-loaded her sons’ inheritance—by funding Roth IRAs on their behalf: “We’re now free to spend our money without guilt that there’ll be nothing left for our kids.”
“Restaurants frequently remind me of the concept of diminishing returns,” writes Dennis Quillen. “The first sips of beer are the best. Additional sips are progressively less and less rewarding.”
Working for yourself is a costly proposition. But it comes with one huge financial benefit, says Ross Menke: You can contribute $55,000 to a solo 401(k) in 2018, or $61,000 if age 50 or older.
“Amid the gales of creative destruction, it’s hard to know which companies will thrive,” notes Dennis Friedman. “Among the 26,000 companies traded in the U.S. over the past nine decades, just 36 existed for the entire period.”
Want to get even more money into a Roth IRA? See if your employer’s 401(k) plan will accept after-tax contributions. Adam Grossman explains.
“When I was 13, I talked my way into a job at a local pet shop for $5 a week, plus a free tropical fish now and then,” recalls Richard Quinn. “I even tried raising tropical fish to sell, but they ate their own.”
For the past decade, Phil Dawson and his siblings have cared for their mother. What have they learned? Lesson No. 4: Many hands make for light work—and more disagreements.
“Watch out for things like private REITs and equity-indexed annuities,” warns Tony Isola. “Risk doesn’t disappear just because you can’t get a daily price quote.”
Getting married or moving in together? Maybe it’s time for the talk, says Kathleen Rehl—the one about how you’ll handle your new household’s finances.
“I’m not saying that Apple is over the hill,” opines Adam Grossman. “I’m just saying it’s important to avoid loving an investment so much that you lose objectivity.”
Where are stocks headed in the months ahead? If you ask a stupid question, you’ll get a stupid answer.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . His most recent articles include Just Asking, Warning Shot and Ignore the Signs.

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Seven Deadly Sins

MANY FINANCIAL advisors are allowed to recommend investments that are great moneymakers for their own retirement—but not so good for those who buy them.

These salespeople are incentivized to push clients into investments that pay the highest commissions. It’s a system that jeopardizes the retirement of millions of Americans. Billions are spent annually on unnecessary fees. While the industry has many decent people, the sinners outnumber the saints. Here are just seven of their transgressions:

Variable annuities in retirement accounts. This is the investment equivalent of wearing both a belt and suspenders. Retirement savers end up paying high fund fees for tax deferral that their retirement accounts are already giving them for free.
Loaded mutual funds. With so many low or even zero commission options available, why pay a dime to enter or leave an investment? Upfront class A sales charges are brutal for small investors in retirement accounts. Until certain breakpoints are reached, the little guy often ends up losing 5% from each contribution, plus paying ongoing fund fees that are frequently above 1%. We have seen this time and time again in 403(b) plans. Advisor-sold 529 college savings plans are another fertile ground for this unethical practice.
Free lunch and dinner seminars. This age-old trick is a lure to sell unnecessary, high-fee products. Attendees feel they owe their hosts something. Go to one of these seminars and you could end up consuming the planet’s most expensive chicken marsala.
Hidden fees. Unlike most other industries, investors seldom receive a bill from their advisors. Fees are silently subtracted and often difficult to detect, creating ample opportunity to overcharge and deceive clients—unless those clients are willing to read a 500-page prospectus. Some scoundrels even use this deception to claim investments are “free.”
Pushing yield. Many conservative investors demand investment income. Unsavory advisors satisfy this desire by finding them risky bonds, master limited partnerships and stocks with high dividend payments. Often, clients end up buying individual low-quality bonds at high markups that put their money at great risk. Losing 40% of principal, while earning 10% income, isn’t a sustainable strategy.
Questionable certifications. There are more than 160 different investment advisor designations. Aside from a few, like the Certified Financial Planner and Chartered Financial Analyst designations, most aren’t worth the paper they’re printed on. This doesn’t stop the unscrupulous from marketing them as if they’re impressive credentials.
Selling illusions. Watch out for things like private REITs and equity-indexed annuities. “It’s like a CD, but you earn the returns of the stock market” is often the catchphrase. Without FDIC insurance, this couldn’t be further from the truth. Risk doesn’t disappear just because you can’t get a daily price quote.

Tony Isola’s previous blog for HumbleDollar was 403 Beware. Tony works at Ritholtz Wealth Management, specializing in helping educators reach their financial goals using a fiduciary model. To learn more, visit his blog,  A Teachable Moment, or follow him on Twitter   @ATeachMoment.

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Two’s a Crowd

IRS AUDITS are usually uneventful. Auditors ask taxpayers to produce receipts, canceled checks and similar documentation to verify deductions and other facts and figures. When taxpayers come up with the required substantiation, examiners move on to other audits. In fact, the feds frequently close cases without exacting extra taxes—and sometimes they even authorize refunds.

But things aren’t always so friendly.

Be concerned when an IRS investigator walks in unannounced at your home or office and asks to see your records. Odds are, that sort of surprise audit means the agency suspects you filed returns that are fraudulent.

If you’re targeted for what looks like an out-of-the-ordinary audit, be sure to find out the official designation of the person with whom you’re suddenly chatting. Is the Sherlock a revenue agent with the Examination Division or a special agent with the Criminal Investigation Division?

The difference isn’t academic. Revenue agents conduct routine examinations of dependency exemptions, business expenses and similar items. Ordinarily, special agents are assigned exclusively to investigate suspected criminal violations of the tax laws.

Also, be on guard when you receive advance notice of an audit, but it turns out two examiners show up to scrutinize returns. Both may be revenue agents—one a veteran and the other a rookie who’s along merely to get some on-the-job experience—which is less worrisome.

The appearance of two examiners, however, often means that a special agent and a revenue agent are teamed together on a “joint investigation”—the bureaucratic euphemism for what goes on when the agency accumulates evidence for a criminal prosecution.

The penalties for tax evasion are severe: a stay at Club Fed of as much as five years and/or fines of as much as $100,000 for each fraudulent return. Those fines are on top of the hefty civil penalties for fraud. You’ll also be dinged for the back taxes and interest that the IRS routinely exacts from cheaters who are spared criminal prosecution.

The IRS sets strict guidelines for its special agents on what they can and should do when they drop in—with or without notice. They’re supposed to identify themselves as special agents and to advise individuals of their constitutional rights. The ones that most concern you are “the right to remain silent and to be advised by an attorney.”

What should you do if you become aware that you’ve been singled out for a criminal investigation? Your options immediately dwindle to one: Get the advice of an attorney knowledgeable about criminal investigations before you hand over any records or make any statements to special agents. Such disclosures can come back to haunt you when they’re pieced together and repeated on the witness stand by government sleuths.

J ulian 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 Stepping Up, Give and Receive, and Hitting Home. Information about his books is available at JulianBlockTaxExpert.com. Follow  Julian on Twitter @BlockJulian.

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