Jonathan Clements's Blog, page 398

Human Condition

RISK IS ARGUABLY the most important financial topic. But which risks should we worry about? There are all kinds of contenders: recession, accelerating inflation, political upheaval, global conflicts, sharp market declines, individual company turmoil.

But I would argue that, as we each assess our personal finances, one risk trumps all of these—and that’s the risk that we have lousy career earnings and maybe even find ourselves without a paycheck. How come? It isn’t simply that we would likely struggle to pay the bills and service our debts. Equally important, without a heathy paycheck, it’s tough to be a good saver—and that, more than anything, is the key driver of our long-term financial success.

How can we protect against this risk to our so-called human capital? There are the obvious steps: Build up an emergency fund, so we can survive a spell of unemployment. Get health and disability insurance, in case of illness or an accident. Purchase life insurance if we have a family who depends on us, so our untimely demise won’t leave our loved ones in the financial lurch. But here are four additional steps we might take:

1. Get educated—prudently. Incomes, on average, are closely related to educational attainment. According to a Census Bureau study, master’s degree recipients have expected lifetime earnings of $2.8 million, figured in today’s dollars, versus $2.4 million for those with a bachelor’s and $1.4 million for those who only graduated high school.

But before you rush off to get another degree, think carefully about whether the career you’re pursuing is one you really want. I’ve heard too many stories of 20-somethings who collected advanced degrees, only to find themselves with jobs they didn’t especially like. Sound bad? It’s even worse if collecting that advanced degree involved assuming hefty amounts of education debt.

An added danger: While higher degrees typically mean higher pay, those jobs often also take longer to find. That means you could face a lengthy period of unemployment. The size of your emergency fund should reflect that risk.

2. Make hay while the sun shines. Forget the old advice about socking away 10% or 12% of income every year. That might generate enough for retirement if you hold a steady job for 30-plus years. But what if your job isn’t so steady? As a precaution, save as much as you can when times are good.

And, no, you won’t regret your financial caution. If you hit a rough patch, you’ll be happy for the extra savings. What if all goes well? You can always reward yourself with a lower savings rate later in your career—and perhaps even retire early.

3. Strengthen family ties. Families have long helped each other through tough times. Sure, if you find yourself out of work, you’d rather not ask your parents or your siblings to lend you money. But that sort of thing happens all the time—and I don’t think it’s so terrible, provided it’s treated like a business deal and everybody involved understands the terms under which these loans are being made.

Such intra-family financial cooperation shouldn’t, I believe, be confined solely to moments of money stress. When my daughter bought her home in 2015, I wrote her a private mortgage. It has turned out to be a good deal for both of us: She avoided a bunch of closing costs and I receive a higher interest rate than I could have earned by buying bonds.

Indeed, I think there’s great value in viewing families as a financial unit, where everybody has each other’s back. When we buy insurance, we’re effectively sharing financial risk with a bunch of strangers. Why not share risk with those you love? Historically, one of the most common ways to pool risk is to get married. I’m not suggesting folks walk down the aisle simply for the financial benefits, especially given the hefty cost and disruption of divorce. Still, the financial advantages are hard to ignore: With two incomes coming in, you have a built-in shock absorber, should one of you lose your job.

4. Join the capitalists. There’s been much handwringing about the increase in income inequality since the late 1970s and early 1980s. Those lower down the income spectrum—and those in certain industries—haven’t fared nearly as well as top-income earners.

But even as income inequality has grown, stocks have soared. That’s no great surprise: Lower wages mean healthier corporate profits. What to do? Whether you’re an ardent capitalist or a card-carrying Marxist, the implication is clear: If labor is going to continue to suffer in the decades ahead, one way to hedge your bets is to be a capitalist—by investing heavily in stocks.

Follow Jonathan on Twitter @ClementsMoney and on Facebook.

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Proceed with Caution

MY FRIEND ROSTISLAV, who would know, tells me that in Russian there’s no equivalent for the word “privacy.” That’s because privacy—as we understand it—is a foreign concept. Children’s grades are posted publicly in schools and it isn’t considered impolite to ask someone’s salary.

Why is this relevant? As a stock market investor, if you have international exposure, you’ll want to be aware of these cultural differences, because they impact how other countries run their economies and how they regulate—or don’t regulate—their investment markets. This is especially true for emerging markets such as Russia, Brazil, India, China and Indonesia.

The differences fall into several categories. Insider trading rules, for example, vary widely around the world. Even where it’s prohibited, many countries simply don’t prioritize enforcement. Rules governing public companies also differ, especially when it comes to requirements for financial audits. Legal systems differ as well, resulting in varying levels of contract enforcement, copyright protection and overall shareholder protection.

In the most extreme cases, governments have forcibly taken over private companies. Last year, for example, the Indonesian government succeeded in forcing U.S. company Freeport-McMoRan to turn over its crown jewel: majority ownership in the world’s largest gold mine, which is located in Indonesia. From the Indonesian government’s perspective, it was simply doing what it thought was best for its people. But it certainly wasn’t good for Freeport’s shareholders.

It isn’t my intention to pass judgment on other countries’ norms. Sometimes other countries’ approaches have benefited investors. In Japan, the Ministry of International Trade and Industry, which Americans have tended to view as heavy-handed, helped drive enviable industrial growth in the years following the Second World War.

Moreover, despite the cultural differences, investments in emerging market stocks have been profitable over time. Still, the data clearly indicate that, on average, emerging markets carry greater risk than domestic investments. In 2008, when U.S. stocks declined 37%, Russia’s market plunged nearly 74%. That wasn’t the first time we’ve seen such large performance gaps—and I doubt it will be the last.

Plan to invest in emerging markets? Here’s how I would balance risk and reward:

First, keep your investment modest. While I believe it’s worthwhile to invest in emerging markets, I would limit a stock portfolio’s exposure to no more than 10%, even if you consider yourself an aggressive investor. This is perhaps more art than science. But the logic is this: Own enough for it to make a difference, but not so much that it would cause you to lose sleep.

Second, diversify broadly. Don’t place bets on individual regions, countries or companies. Instead, to dampen volatility, I’d opt for a fund that includes all the emerging market countries, such as Vanguard’s VWO, Schwab’s SCHE or iShares’s IEMG. (Be careful to avoid iShares’s EEM, which is a similar fund but nearly five times more expensive than IEMG.)

To understand why, consider 2008, when Russia’s market sank 74%. In that year, emerging markets as a group held up much better, down “just” 53%. You wouldn’t have been happy with that performance—but if you hadn’t been diversified, you might have been far less happy.

Third, beware the myth that robust economic growth means robust stock returns. This may seem like a logical assumption. But according to a study by Elroy Dimson, Paul Marsh and Mike Staunton, there’s no conclusive correlation between economic growth and investment returns. In fact, some studies have found a slightly negative correlation. Over the past 10 years, for instance, the stock market in sleepy Denmark has far outpaced the market in fast-growing China.

Finally, don’t buy emerging market bonds. Instead, stick with stocks. In my view, the fixed-income portion of a portfolio is there primarily to provide stability, not to make money. While emerging market bonds may offer higher yields than U.S. bonds, they also carry greater risk of loss. According to one analysis, between 1999 and 2015, 12 different emerging market governments defaulted on their bonds 17 times—about once a year, on average.

Adam M. Grossman’s previous blogs include Old Story,  Slipping Away  and  All Thumbs . 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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Execution Matters

TWO CHORES that most people gladly put off: The first is writing a will—and the second is updating it to reflect changed circumstances. Either way, it’s crucial to name the right executor.

Regarding the first chore, my client roster includes recalcitrant individuals who’ve yet to write their wills. I regularly remind them how badly things could turn out if they fail to do so. For instance, their assets might wind up with individuals whom they never intended to benefit or they consider less deserving of their largess than others.

Regarding the second, I tell those who heed my homilies that costly and expensive events could occur if they neglect to update their wills to reflect changes in their lives. What changes? I cite events like moving to another state, entering into a marriage or ending one, significant increases or decreases in their net worth, or heirs that unexpectedly predecease them.

I also exhort clients to think carefully when selecting or replacing executors—the persons who are the key figures in the settling of their estates. They’re best served by individuals willing to take jobs that are potentially time-consuming and demanding. As for wannabe executors, I tell them to reflect on how badly things can end up if they make mistakes; more on that in a moment.

But let’s start by going down the list of executors’ duties. Their first duty is to assemble and value all of the deceased’s assets. Executors have to ferret out records for bank accounts, brokerage accounts, tax-deferred retirement accounts and insurance policies, as well as other assets like real estate, art, jewelry and automobiles.

Besides those chores, executors need to unearth information about debts, mortgages and tax records, and figure out if the person had safe deposit boxes, made loans to family members or others, or made charitable pledges.

Their next responsibility: Pay all bills and charges. Executors typically turn to professionals for those tasks. The list might include the timely filing of the deceased’s final income tax return, federal estate taxes, state inheritance taxes and the estate’s income tax return, along with the payment of any taxes owed.

When can executors distribute assets in accordance with wills? Only after they’ve valued assets and paid bills. The executors’ final responsibility: Submit accountings to the courts (usually designated “probate,” but sometimes called “orphan’s” or “surrogate’s”) for everything they’ve done.

That’s how the story usually ends. But many executors belatedly learn that their reliance on the counsel of attorneys, accountants and other professional advisers doesn’t relieve them of responsibility for mistakes.

Suppose the IRS says taxes remain unpaid or forms were filed late. The agency’s Stepford response is to bill the executors. After all, the law says they’re personally responsible in those kinds of situations. The courts routinely uphold IRS assessments of taxes, penalties and interest charges.

The need to obtain proper tax advice was made expensively clear to the son and daughter-in-law of Henry Lammerts, who owned a Cadillac dealership in Niagara Falls, New York, and died in 1961—and who had designated them as his executors. On Henry’s death, his son took over leadership in settling the estate. While the son was under the impression that a tax return had to be filed for his father, he was unaware of the need to file an income tax return for the estate.

The son found out from his accountant that no return had been filed reporting income received by the estate. The filing was eventually made seven months after the due date and elicited an IRS assessment that included a sizable late-filing penalty.

The executors argued that they were new at this sort of thing and had relied on their accountant and the estate’s lawyer to do whatever was necessary. Mirabile dictu, the accountant’s and the lawyer’s recollections significantly differed when they testified in court.

The accountant said there was nothing in his past services to the family to suggest that, on his own initiative, he would have to file an income tax return for the estate. Similarly, the lawyer pointed out that neither of the executors had asked him for a rundown of the responsibilities attached to being an executor. Consequently, the trial court’s approval of the penalty was upheld by the Second Circuit Court of Appeals.

Suppose, as is not uncommon, executors volunteered to serve without compensation and weren’t heirs. Would that persuade the courts to rule that executors who received nothing also owed nothing to the IRS? Put it this way: If I’m going to represent one of the two parties and I’m being compensated on a contingency basis, I’d want to represent the IRS.

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 Taking Shelter, For the Record and The Dreaded Letter. Information about his books can be found at JulianBlockTaxExpert.com. Follow Julian on Twitter @BlockJulian.

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Leap of Faith

SOME PEOPLE SAY I eat like a dog. I eat the same food everyday. For breakfast, I have egg whites with mushrooms on a whole wheat tortilla, and oatmeal with fruit and almonds. For lunch, I have a salad of tomatoes, cucumbers, carrots, avocado and baby spring mixed lettuce, and usually a nonfat bean and rice burrito.  For dinner, I have vegetables like broccoli, cauliflower, spinach and squash with fish or poultry. When I feel adventurous, I might have a turkey burger with a little mayonnaise.

My lifestyle generally is just as disciplined as my eating habits. Some people might describe it as plain and boring. I live in the same small condo I bought more than 30 years ago. I drive a 2010 Ford Fusion, which I plan on keeping until it becomes too costly to repair. I exercise every morning, usually at the same gym. I go to bed every night at 9 p.m. and wake up every morning at 4 a.m. Every day, I listen to the same music from the 1960s.

As you can see, I don’t like change and I’m very disciplined in how I live my life. The question I keep asking myself is, why can’t I have the same discipline when it comes to investing? Last year, I wrote in a blog about the four simple investing rules I follow. Rule No. 4 says I control my emotions by tuning out the noise and rule No. 3 says I don’t make significant changes to my portfolio.

Lately, I have done just the opposite.

In 2017, I lowered my stock position from roughly 50% to 25%, plus I made changes in the mutual funds I own. At the time I made these changes, I was losing confidence in the sustainability of the bull market and wanted to reduce my risk. Tomorrow, I will probably have reasons I should make further changes to my portfolio.

Why do I have so little discipline when it comes to investing? I’ve concluded I have a difficult time dealing with things in my life that aren’t black and white. For instance, I feel pretty confident the food I eat are nutritious and are beneficial to my health.

But when it comes to investing, matters aren’t so black and white. What the stock or bond market is going to do tomorrow or 10 years from now is pretty much anyone’s guess. Investing requires faith that what you’re doing today will lead to a successful outcome. Maybe what I need is a little faith.

In the absence of that faith, I’m falling back on a friend. To bring more discipline to my investment decisions, I decided to share my portfolio with a close friend—and to confide in her next time I get the urge to make major portfolio changes.

Dennis Friedman retired at age 58 from Boeing Aerospace Company. He enjoys reading and writing about personal finance. His previous blog was Lessons Learned.

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Homeward Bound

WHEN I GOT divorced, I went from living in a 3,000-square-foot house to a 700-square-foot apartment. For 20 years, I’d been a homeowner. I’d dealt with the drudgery of yardwork, the financial pain of a city-mandated “sewer upgrade” and a never-ending stream of issues with broken appliances, furnaces and hot water heaters.

For the past five years, I’ve been a renter. I’ve dealt with noisy neighbors, steep rent increases and the inevitable boredom that comes with living somewhere where you can’t paint the walls, install new flooring or hang any “permanent fixtures” on the walls.

Of course, owning and renting also each come with benefits. Which option will I choose for retirement? My current thoughts on the subject can be broken down into five factors:

1. Location. The only thing I’m currently sure about is that I’ll relocate to another part of the country. The grey-sky dreariness of the Pacific Northwest, along with the rapidly increasing size of the cities here, no longer makes this part of the country very appealing to me. After living in the Northwest for more than 40 years, I’m ready to leave. Where I decide to move to will depend not just on climate, but also on housing prices, tax rates and the region’s political climate.

Moving to a new location certainly appeals to my sense of adventure, but my practical side keeps my finances in mind. I’ll probably rent for at least a year once I decide where I’m headed. Buying a home, only to discover I don’t really like living somewhere with 300 days of sunshine a year, could be a costly mistake.

2. New or used? The first house I owned was exactly what you think of when you hear the words “fixer upper.” Built in the 1920s, it had been neglected for at least three decades. For five years, I spent nearly every weekend refinishing the wood floors, working on the electrical system or patching the lath and plaster walls. It was a learning experience and I don’t regret the knowledge I walked away with.

Now that I’m older, and have other interests, I recognize owning a home that needs extensive remodeling wouldn’t be very enjoyable. When I’m ready to buy, I’ll likely try to find a home built within the last 15 to 20 years.

3. Size. Apartment life has made me appreciate a simpler lifestyle. When I recently moved to a two-bedroom unit—and gained 200 square feet of living space in the process—it felt like I’d moved into a mansion. I suspect a 1,200 to 1,400-square-foot home will serve me well in my retirement years.

4. Style. I’ve learned a few things from watching my relatives grow older. My ideal retirement residence will be a single-level home with no stairs or steep driveways. In addition, I’ll be on the lookout for a floor plan that would easily accommodate mobility assistance devices.

5. Mortgage or cash? While I’d prefer to pay cash for any home I purchase, I’m not sure that will be feasible. My current plan is to make a sizable—meaning 50% minimum—down payment on my retirement home. Will I qualify for a mortgage to cover the other 50%? I’d love to know the answer—but I don’t think I’ll know until the time comes.

Kristine Hayes is a departmental manager at a small, liberal arts college in Portland, Oregon. Her previous blogs include Council on Aging,  Four Numbers  and  My Five Mistakes .

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June’s Newsletter

WE HAVE A SLEW of economic problems in the U.S. But many of them can be traced, at least in part, to a single cause: We increasingly have too few workers and too many retirees. HumbleDollar’s latest newsletter looks at the issue—and what it means for both public policy and our portfolios.

June’s newsletter also touches on my struggle to understand the financial behavior and beliefs of my fellow Americans, and it includes the usual list of the seven most popular blogs from the prior month.

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Getting Up There

DEPENDING ON WHO you talk to, we have a major problem in the U.S. with productivity growth, economic growth, the trade deficit, the budget deficit, public sector pensions, Social Security, Medicare, Medicaid—or, if folks are feeling especially gloomy, perhaps all of the above. But the reality is, these issues are, at least in part, merely symptoms of a far larger problem.

What’s that? We’re rapidly approaching the point where we don’t have enough workers producing the goods and services that society needs. In other words, what we have, more than anything, is a demographic problem.

Consider the size of the working-age population relative to those of retirement age. As of 2010, there were 4.6 Americans age 20 to 64 for every person age 65 and up, based on data from the United Nations. That figure is projected to fall to 3.5 in 2020 and 2.7 in 2030. The “old-age dependency ratio” continues to deteriorate from there, though at a slower clip.

Worrisome? It is, though other developed nations are in even worse shape. As of 2020, the comparable figures are: U.K. 3, Spain 3, France 2.7, Germany 2.7, Italy 2.4 and Japan 1.9. Fast forward a mere 10 years to 2030, and the numbers are: U.K. 2.5, Spain 2.2, France 2.2, Germany 2.1, Italy 1.9 and Japan 1.8.

Because we’re heading into a world with potentially too few workers and too many retirees, we have the slew of problems that dominate today’s headlines: economic growth stuck below the 3% long-run average, public sector pensions busting state budgets, soaring Medicare and Social Security spending, and so on.

What’s the solution? It’s important to understand what won’t fix the problem. Suppose we “shored up” the Social Security trust fund. We might mandate that the Treasury Department makes large annual contributions to the trust, or have the Treasury pay a higher interest rate on the bonds held by the trust, or invest part of the trust’s assets in the stock market. Suppose all of this allows Social Security to continue paying benefits at current levels for decades to come.

That still leaves a fundamental problem: What happens when those Social Security checks get spent? Remember, stocks, bonds, Social Security checks and cold hard cash are just mediums of exchange. Ultimately, they have value because we can convert them into goods and services. If enough goods and services are available to be bought, all’s fine and dandy.

What if they aren’t? Houston, we have a problem. Suddenly, we might be looking at accelerating inflation, as all those dollars compete to buy a limited supply of goods and services—and some folks will find they can no longer afford the lifestyle they once enjoyed.

What to do? Either we need to increase the supply of goods and services or we need to restrain demand. There’s a slew of possible solutions, but here are four possibilities.

First, we could push everybody to spend less. If we don’t want the ugliness of higher inflation, we might raise taxes or cut Social Security benefits, so people have less money to spend. Needless to say, this is the least desirable option.

Second, we could increase the number of folks in the workforce. We might allow greater immigration, offer tax breaks to employers who hire older workers and raise the eligibility age for Social Security. That larger workforce would spur economic growth, while also increasing the income and payroll taxes needed to fund government spending.

“Within a few decades, some parts of the developing world will have even bigger demographic problems than the U.S.”

We can debate the best way to keep folks in the workforce for longer. But however we do it, I don’t think it’s such as awful prospect: Many of us get a lot of satisfaction from work—as long as we can do it on our own terms, perhaps working part-time after age 65 or working from home. In fact, even without government action, I suspect many folks will opt to stay in the workforce for longer, either fulltime or part-time, simply because they can’t afford the retirement they want. It could be that many Americans are already helping to solve our demographic problem—through their abject failure to save.

Third, we might partially solve our demographic problem with innovation. As the supply of workers slows, expect the pace of automation to increase, as companies substitute capital for labor. If the robots are coming, we should welcome them with open arms.

Fourth, we could get our goods and services from abroad. The demographics in developing countries are far more favorable than in the developed world. Again, consider the dependency ratio—the number of working-age folks for every person age 65 and up. More developed regions (Europe, North America, Japan and Australia) see their collective dependency ratio plunge in the years ahead: 3.8 in 2010, 3 in 2020, 2.4 in 2030 and 2 in 2050.

Less developed regions (Africa, Latin America and Asia except Japan) also see their populations age in the decades ahead, but the absolute dependency ratio remains far higher: 9.6 in 2010, 7.7 in 2020, 5.9 in 2030 and 4 in 2050. Potentially, these less developed nations will sell us the goods we need and, in return, we’ll sell them our assets—entire corporations, stocks, bonds, real estate, whatever they’ll take.

Interestingly, within a few decades, some parts of the developing world will have even bigger demographic problems than the U.S. As of 2050, Brazil’s dependency ratio will rival that of the U.S., while the populations of China and Taiwan will be even more skewed toward the elderly.

But for now, most developing nations have young populations and the potential for vigorous economic growth. This is the reason I’m so enthusiastic about emerging market stock funds, such as the index funds available from Fidelity Investments, iShares, Charles Schwab and Vanguard Group. An added reason: Emerging stock markets are significantly cheaper than stocks in developed nations based on the full range of valuation measures—price/earnings ratios, Shiller P/E, dividend yields, share price-to-sales, you name it.

Want to learn more about all of this? Check out the work of Rob Arnott, chairman of money manager Research Affiliates. Back in 2003, he co-authored an excellent paper on the topic. His website also has a section packed with intriguing demographic data, as well as a six-minute video that summarizes his views.

My Bubble

THEY’RE QUESTIONS all of us have asked in recent years: How can anybody believe that? How could they possibly behave that way? I’m not talking about the behavior and beliefs of politicians, actors and sports stars, as well as that of their supporters and detractors.

Rather, I’m thinking about other people’s finances. Like everybody else, I live in a bubble—and it’s a struggle to understand the behavior and beliefs of many of my fellow Americans:

Increasingly, I find it hard to appreciate how baffling money is to so many people. It seems so simple to me: You spend less than you earn, stick the excess in a few low-cost mutual funds, buy a minimal amount of insurance, limit your debts and take a few basic estate planning steps. But none of this seems simple to most folks.
I’ve slowly lost touch with the financial struggles of many Americans. Just as I find it hard to recall how baffling the world of money once seemed, I’m now far removed from my 20s, when making ends meet was a weekly juggling act.
I live in an investment world where the overriding concern is capturing market returns as cheaply and tax-efficiently as possible. What about the testosterone-infused pursuit of market-beating gains? Why would anybody waste their time and money on that?
I’ve lost almost all desire to acquire new possessions. When I see folks with designer handbags or luxury cars, I am—more anything—puzzled. What’s to get excited about? Don’t they realize that, a few years from now, those will be nothing more than scuffed-up used goods?

To counteract all of this, I pay close attention to financial statistics and have turned them into a regular feature on HumbleDollar’s homepage. But mostly, I’ve been spending more time talking to folks about their finances—and trying to put myself in their shoes.

May’s Greatest Hits

HERE ARE THE SEVEN most popular blogs published by HumbleDollar last month:

Where’s the Party?
Four Numbers
My Five Mistakes
Bad Idea for Rent
Old Story
Age-Old Myths
All Thumbs

Last month also saw heavy traffic for May’s newsletter and for a blog published in late April, How About Later?

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook .

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Council on Aging

MY MATERNAL grandmother recently celebrated her 97th birthday. Until three years ago, she lived in her own home. Now, she lives in a senior apartment community, where she remains active and independent.

Part of my grandmother’s decision to move out of her home was prompted by her desire to be closer to family members who could assist in her care. According to a 2015 study, over the previous 12 months, more than 34 million Americans had provided some type of unpaid care to an adult age 50 or older.

As I investigated the aging-in-place resources available to my grandmother, I came across the National Council on Aging (NCOA) website. Founded in 1950, the NCOA is a 501(c)(3) tax-exempt organization dedicated to helping people age 60 and older with issues related to aging.

Want to learn more about Medicare? Head to an NCOA site, MyMedicareMatters.org. By entering some basic information, such as date of birth and zip code, visitors can retrieve information about Medicare-related programs specific to the area where they—or an aging relative—live. For someone like me, who hasn’t yet had to figure out the veritable alphabet soup of Medicare programs, the information was useful and easy to understand. As I pondered my grandmother’s situation, I found an article discussing the distinction between “home health care” and “home care” particularly enlightening.

Many NCOA programs focus on connecting seniors in low-and-moderate income brackets with potential resources. For instance, another NCOA site, BenefitsCheckUp.org, claims to have helped almost 7 million people find some $25 billion in benefits they, or their loved ones, are eligible for. Similarly, EconomicCheckUp.org provides information on basic budgeting strategies, work programs and financial planning.

Also check out the NCOA’s Guide to Benefits for Seniors. For those of us who are helping to care for an elderly relative, it’s a great starting place to learn about the variety of services available to seniors.

Kristine Hayes is a departmental manager at a small, liberal arts college in Portland, Oregon. Her previous blogs include Four Numbers,   My Five Mistakes  and  Fueling the Fire.

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Wait, There’s More

IS WHAT YOU’RE paid what you’re really paid? Probably not. The compensation that you don’t see each payday has a tremendous impact on your financial security and your future standard of living—and should affect how much you save and how you invest.

Defined benefit pension plans can be the most valuable form of noncash compensation. Health benefits for active and retired employees are a close second—especially so because they’re tax-free compensation (and hence a huge revenue loss for the federal government). On top of that, there’s your employer’s contribution toward Social Security, plus any employer match in your 401(k) or similar defined contribution plan.

Noncash compensation is especially important for public sector workers. Bureau of Labor Statistics data show 62.6% of the compensation for state and local government employees took the form of wages and salaries, versus 69.6% for private sector workers.

Benefits should be a crucial consideration when weighing one job against another, and yet workers seem to undervalue them: 62% of employees couldn’t estimate how much their employers spent on health benefits, according to a HealthPopuli blog. Among those who could come up with an estimate, most weren’t confident in their guess. Some 23% calculated that the monthly spending on health benefits by their employer was below $500—less than half the actual amount.

Unfortunately, private sector employers have largely abandoned defined benefit pensions. According to the Pension Rights Center, only 15% of private sector workers participate in a pension plan. State and local government employees are much better off, with 74% enjoying pension coverage. But even here, the value of noncash compensation is underappreciated. Many public employees are convinced they’re underpaid. In truth, their mix of compensation is simply different, with more on the noncash side—and often more in total compensation. The differences are especially dramatic for federal employees, where total compensation can be as much as 53% higher than for their private sector counterparts.

What does all this mean for workers? It’s crucial to understand the value of your noncash compensation—and figure it into your retirement savings plan. If you’re covered by a pension, you may be able to save less, take more investment risk and perhaps retire sooner. If you’re also among the few who still have employer-provided retiree health benefits, you’ll be in even better shape. Such benefits can save you thousand of dollars a year, further reducing the amount you need for a comfortable retirement.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous blogs were Age-Old Myths, For Your Own Good and Choosing Badly. Follow Dick on Twitter @QuinnsComments.

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One Cheer

ANNUITIES ARE OFTEN dismissed as costly, complicated contraptions that are more lucrative for Wall Street than investors. And I’m half-inclined to stick with that blanket condemnation, rather than muddy the waters by offering a more nuanced view. I hate the idea that somebody might read this blog and then buy the wrong type of annuity—and end up making a horribly expensive mistake.

Still, I believe there are four types of annuity that can make sense for investors. Some background: The term “annuity” covers a multitude of products. What’s the unifying thread? All commercial annuities are backed by an insurance company. But it sometimes seems like that’s the only thing they have in common.

There are variable annuities where your results vary with the investments you select and fixed annuities where your return used to be fixed, but now can vary thanks to the abomination known as equity-indexed annuities. There are tax-deferred annuities that are designed for retirement savers, and immediate annuities for those already retired and looking to generate income. But tax-deferred annuities are now also used to generate retirement income, thanks to living benefits riders.

Confusing? You bet. Rather than tell you why so many of these are horrible products, let’s focus on the four reasonable choices.

First, if you’ve maxed out on both your employer’s retirement plan and your individual retirement account, and you’re inclined to buy tax-inefficient investments like taxable bonds and real-estate investment trusts, there’s a case for funding a low-cost variable annuity. The term “low cost” is the crucial qualifier here—and all roads lead to Vanguard Group. The total annual expenses on Vanguard’s annuity range from 0.4% to 0.71%, depending on the funds you pick.

Second, if you’ve already delayed Social Security to age 70 and you’re looking for more lifetime income, I would consider an immediate-fixed annuity. Unlike a variable annuity, an immediate-fixed annuity is a simple product with relatively low implied costs. The income you receive depends on prevailing interest rates when you buy, which means immediate-fixed annuities have become somewhat more attractive this year, as rates have headed higher. In 2017, just $8.3 billion was stashed in immediate fixed annuities, a tiny portion of the $203.5 billion that was invested in all annuities combined, according to data from LIMRA Secure Retirement Institute.

Don’t like the idea of a lifetime income annuity, where your early demise would end up enriching the insurance company? That brings us to the third type of annuity I like: charitable gift annuities. These won’t pay you as much income as an immediate fixed annuity from an insurance company, but you’ll help a worthy cause and get a tax break for your generosity.

Fourth, I see a role for deferred-income annuities, also known as longevity insurance. You might buy a deferred-income annuity at, say, age 65 that will pay income starting at age 85. This can take a lot of the uncertainty out of retirement planning, because it frees you up to spend down your remaining savings, knowing you’ll have a regular stream of income waiting for you, should you live to a ripe old age.  You might allocate 15% or 20% of your savings to the deferred income annuity, to cover your living costs from age 85 on. Meanwhile, between 65 and 85, you could gradually spend down your remaining savings, perhaps spending 1/20th in the first year, 1/19th in the second and so on. But as with immediate fixed annuities, deferred-income annuities aren’t exactly flying off the shelf. In 2017, they attracted just $2.2 billion from investors, says LIMRA.

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