Jonathan Clements's Blog, page 401

This Week/April 1-7

ESTIMATE YOUR RETIREMENT INCOME NEEDS. Take your annual salary. Subtract how much you save each year and pay in Social Security payroll taxes. Also subtract your annual debt payments, including your mortgage—assuming these debts will be paid off by retirement. Result: You’ll know roughly how much you will need each year for a comfortable retirement.

The post This Week/April 1-7 appeared first on HumbleDollar.

Unanswered

THERE ARE MANY FINANCIAL DEBATES that shouldn’t be debates at all. Folks strike strident poses, but often their positions don’t reflect a careful weighing of the arguments. Rather, they either have a vested interest or their ego is invested. Think of commission-hungry insurance agents who pound the table for cash-value life insurance, or retirees who took Social Security early and then insist that early is always best.

In most of these cases, if we marshal the facts and apply some reasoning, we can arrive at a sensible answer. Yes, most retirees should delay claiming Social Security. No, indexing is not distorting the market. Yes, stock-picking is a loser’s game. No, most folks shouldn’t buy cash-value life insurance. Yes, it can make sense to pay off a mortgage early. No, individual bonds aren’t always superior to bond funds.

But there are four questions where reasonable people can disagree—and where it’s all but impossible to settle the debate, in part because we find ourselves peering into an extremely cloudy crystal ball. I have my take on these four questions. But I can’t promise you I’m right.

1. What’s a retiree’s best strategy for drawing down a portfolio?

Even though I consider myself semi-retired, I must confess I’ve grown weary of this debate and rarely read new studies when they appear. Often, they start with the classic 4% withdrawal rate strategy—you spend that percentage of your nest egg’s value in the first year of retirement and thereafter step up the annual sum withdrawn with inflation—and then try to improve upon it. But the solutions seem overly engineered and overly dependent on the investment returns assumed.

In the end, what we need is a strategy that’ll work even if markets are miserable and even if we live an extraordinarily long life. My personal plan: Delay claiming Social Security until age 70, use a portion of my bond-market money to purchase an immediate fixed annuity that pays lifetime income, and each year withdraw 5% of my portfolio’s beginning-of-year value. With this last strategy, I’ll be compelled to spend less if markets perform poorly—and I’ll never run out of money, because I will always be withdrawing a percentage of whatever remains.

2. Is factor investing destined to fail?

You can view factor investing as either an intriguing rethinking of risk—or a dubious attempt to bring renewed respectability to the beat-the-market game. The basic notion: By emphasizing certain types of stocks—value shares, those with upward price momentum, small-cap stocks—investors can raise their portfolio’s risk-adjusted return, if risk is measured by share price volatility.

Academics argue this isn’t a free lunch. Rather, when we overweight these stocks, we’re taking on risk that isn’t reflected in volatility. This risk should be rewarded over the long haul, and hence those who tilt their portfolio toward, say, small-cap value stocks should earn superior long-run returns.

Many investors—professional and amateur—have rushed to take advantage, hoping to goose their portfolio’s performance. But in recent years, factor investing has generated mixed results. That raises two key questions. Did the historical outperformance of these factors really reflect extra risk? And is so much money now seeking to exploit factor investing that prices have been bid up to the point where the return advantage has disappeared?

My hunch is that small-company stocks and value stocks will indeed earn superior returns over the long haul. Small stocks are clearly less financially stable. Value stocks don’t generate the same enthusiasm among investors that growth stocks do, and hence they’re less likely to be overpriced and destined for lackluster returns. But the truth is, I don’t know this for sure—and nor does anybody else.

3. Do U.S. stocks face a great reckoning?

I’ve been wrestling with this question for more than three years—which arguably means I’ve wasted three years, because there’s been no reckoning worth mentioning.

Why all the worry? Corporate profit margins are far above historical averages. Ditto for stock market valuations. Meanwhile, economic growth has been lackluster, in part because of sluggish growth in the labor force, as new entrants barely outpace retiring baby boomers. On top of all this, interest rates and inflation remain notably low—and many wonder how stocks will fare if one or both move significantly higher.

And yet, as if to prove the Wall Street cliché true, stocks have climbed this wall of worry. Indeed, the current bull market just celebrated its ninth birthday.

I have no idea whether stocks are in for a horrific decline. Forecasting short-term returns is a fool’s errand. But I do believe all the worrying is justified—and that we’re highly likely to see modest long-run stock returns. That conviction only grows stronger as shares climb higher.

My five-part plan for investors: Make sure you’re mentally prepared for steep short-term losses, save diligently to compensate for lower expected returns, regularly rebalance back to your target stock-bond mix, consider reducing risk if you’re comfortably on track to meet your goals, and get money out of stocks that you’ll need to spend in the next five years.

But can I let you in on a secret? I’d probably offer the same five-part plan, even if I didn’t expect long-run returns to be lackluster.

4. How much should we invest abroad?

This is another topic that has consumed me in recent years—and readers have noticed that both my recommended international allocation and my own portfolio’s investment in foreign stocks have been drifting higher.

This reflects a change in how I think about portfolio construction. For years, I started with U.S. stocks and then pondered what I should add to reduce risk, without doing too much damage to my long-run returns. That led me to allocate maybe 30% of my stock portfolio to foreign shares, while also holding increasing amounts in bonds as I’ve grown older.

But these days, instead of pondering what to add to a core holding in U.S. stocks, I start with the global market portfolio—the worldwide investable universe—and then decide what to subtract. The global market portfolio consists of four major sectors, all roughly equal in size: U.S. stocks, U.S. bonds, foreign stocks and foreign bonds. In other words, if you want a portfolio that reflects what everybody else owns, you should allocate a quarter of your money to each of these four sectors.

From this mix, I subtract foreign bonds, because I don’t want the extra currency exposure, given that most of my future spending will be on U.S. goods and services. But I’m happy to hold a full helping of foreign stocks, even though it means allocating half my stock portfolio to international markets. There are three reasons.

First, I fear for my portfolio’s performance if U.S. stocks generate truly terrible long-run returns. I can’t imagine that the U.S. would suffer the fate of Japanese stocks over the past 28 years—but then again, three decades ago, nobody could imagine that fate for highflying Japanese shares.

Second, foreign stocks, and especially emerging markets, are much better value than U.S. shares. This makes my increasing foreign exposure seem suspiciously like a short-term market bet—and I’ll concede that valuations have made increasing my international allocation a far easier decision.

Third, and most important, I can’t think of a good reason not to have a market weighting in foreign stocks. The currency exposure doesn’t bother me, given that I have no foreign bonds, and the arguments in favor seem compelling.

Think of it this way: The global market portfolio is the investment mix that reflects the combined judgment of all investors, with their votes cast with every trade they make. I can imagine straying from that mix for reasons for risk. What if I have no worries about risk? In that case, I should stray only if I think I’m wiser than the collective wisdom of all investors. Long experience has taught me never to be that arrogant.

Sneak Peek

FINGERS CROSSED, my next book will hit stores later this year, probably in September. What is From Here to Financial Happiness all about? The book offers readers a 77-day plan for getting their finances in shape.

Some days, the book provides a brief financial lesson. Some days, readers learn about themselves. And some days, I suggest a few simple steps for readers to take.

The book is designed to be a conversation. Indeed, by the time readers are done, I hope they’ll have scribbled all over the book—and perhaps even revised what they earlier wrote.

March’s Greatest Hits

HERE ARE THE SEVEN most popular blogs from last month:

The Tipping Point
ObliviousInvestor.com
Six Figures, Tiny Taxes
My Younger Self
NewRetirement.com
The Unasked Question
Pascal’s Retirement

In addition, readers continued to flock to The $121,500 Guestroom, a blog that was published in early February and which ranked among that month’s most popular.

The online version of March’s newsletter also saw heavy traffic and, indeed, was the site’s most visited page, outside of the home page and the main blog page. Overall, HumbleDollar had its best month in the site’s brief 15-month history, with more page views than ever before—and double the traffic we saw in March 2017.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook .

The post Unanswered appeared first on HumbleDollar.

Four Pillars of Investing

SUCCESSFUL INVESTING IS SIMPLE, but it’s rarely easy. Yet millions of investors, both professional and amateur, assume they know what they’re doing. “We live in this mystical state where everybody thinks they can practice finance,” notes William Bernstein, retired neurologist and author of a fistful of acclaimed finance books. “But you shouldn’t practice without understanding the science of finance.”

What science? Bernstein, whom I’ve known for more than two decades, says it has four elements: investment theory, history, psychology, and the business of investing. Those four elements form the core of one of Bernstein’s best books, The Four Pillars of Investing. “The most important of those four pillars is investment theory—and the most important concept is that risk and reward are inextricably linked.”

When are rewards likely to be greatest? When the danger also seems great. “When things look awful, expected returns are high,” Bernstein says. “When everybody is talking about a given stock, the expected return is going to be lousy. Can anybody spell Tesla? Can anybody spell Apple?”

Historically, you could have earned handsome returns simply by owning a diversified portfolio of stocks. Problem is, at this point, that’s widespread knowledge. Result: Bernstein estimates that today’s expected long-run annual return from stocks is maybe 7%, versus 10% historically.

Want to do better? That might be possible if you rebalance into stocks when share prices plunge and perhaps even increase your allocation. “You need to be able to buy when everybody is running around like decapitated poultry,” Bernstein says.

But he also notes that isn’t easy. “We tend to be overconfident not just about our investment abilities, but also about our ability to tolerate risk.”

All this is made harder by Wall Street, with its relentless focus on forecasting short-run returns and picking market-beating investments. That focus fattens Wall Street’s bottom line at the expense of investors. “Financial companies service customers in the same way Baby Face Nelson serviced banks,” Bernstein quips.

What’s the solution? Save diligently, diversify broadly, buy index funds, think long-term—and pay careful attention to risk. “If you’ve won the game, stop playing,” Bernstein argues. “And to me, stop playing is buying a TIPS ladder.”

If you have enough for retirement, you might purchase individual inflation-indexed Treasury bonds, otherwise known as TIPS or Treasury Inflation Protected Securities, with the amount and maturity of each bond geared to your likely spending needs. Why inflation-indexed Treasurys? Arguably, they are the safest investment available, because they’re backed by the federal government and they protect holders from inflation.

“If you look at financial history, the biggest threat by far is hyper-inflation,” says Bernstein. “For short-term protection, the best place is TIPS. For long-term protection, it’s stocks, because they’re a claim on real assets.”

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook .

The post Four Pillars of Investing appeared first on HumbleDollar.

Face Plant

UNIVERSITY OF CALIFORNIA FINANCE PROFESSORS Brad Barber and Terrance Odean published a research paper on investor behavior in early 2000. The results weren’t pretty. By their reckoning, individual investors lagged the overall market by an average of almost four percentage points a year. The culprit: the costs involved in trading individual stocks.

It isn’t just individuals who struggle with stock-picking. Professional money managers, on average, also trail behind the overall market. Over the past five years, S&P Global calculates that just 16% of mutual fund managers who attempted to beat the Standard & Poor’s 500-stock index actually succeeded. In other words, you would have had better luck—much better luck—guessing on a coin flip.

It is research like this that provides such strong support for index funds—that is, funds that simply buy and hold large baskets of stocks, instead of attempting to pick and choose and trading in and out.

It’s perhaps understandable that casual investors have a hard time picking winning stocks. But why do professional investors also have such trouble? Why is stock-picking such an uphill battle? Consider the recent sorry history of Facebook’s stock.

The drama began Saturday, March 17, when The New York Times published a damaging story about the company, revealing that well-connected political consultants had improperly acquired personal data on more than 50 million Americans from Facebook. Worse still, they had been using this data to influence our elections, including the 2016 presidential election. And there was evidence that the consultants still had the data, despite pledging years ago that they had deleted it. The fallout from this story has been extensive: Congress has demanded an investigation, investors have filed class action lawsuits and Facebook’s chief information security officer abruptly resigned.

In the wake of all this, the company’s stock suffered a double-digit loss. How does this explain why stock-picking is a losing proposition, even for professional investors? The answer: Despite all of Wall Street’s resources, none of the three major branches of investment analysis could have predicted recent events. Consider how each type of analyst viewed Facebook prior to the Times’s revelation:

Quantitative analysts focus only on a company’s financial metrics. They would have given Facebook high marks. Last year, the company’s revenue increased nearly 50% and profits grew even faster. It’s hard to find a company of any size delivering numbers like that, let alone one that has already achieved $27 billion in annual sales.
Fundamental analysts take a holistic view of companies, considering both quantitative and non-quantitative factors. They, too, would have given the company high marks. Facebook’s user base now stands at 1.4 billion people—about half of all Internet users worldwide—and nearly two-thirds of them log in every day. This has allowed the company to sell more ads, even as it raised advertising prices.
Technical analysts examine the shapes and patterns of stock charts to predict where they think a stock is going. What would they have found? Over the past five years, Facebook’s stock had been moving higher in virtually a straight line, so they also would have predicted good things for the stock.

In other words, Wall Street employs a large and diverse army of analysts, yet none of them predicted the recent price drop. It isn’t their fault; No one could have. No one—save for a few journalists—knew what was coming. And that’s precisely the problem with stock-picking. No matter how much time and energy one devotes to analyzing a stock, there’s just no way to predict these sorts of random and frequently occurring events.

Does this mean no one could possibly succeed at picking stocks? There are indeed stock-pickers with exceptional ability. But it’s also exceptionally difficult to find them, because they’re such a minority—and just because they have picked well in the past doesn’t mean they’ll continue to beat the market. The upshot: As tempting as it is to place a wager on one company or another, I think the best path to wealth is to stick with a set of simple, broad-market index funds in an allocation that fits your stage in life.

To be sure, index funds aren’t perfect either. In fact, they buy as many poorly performing stocks as human stock-pickers. But because they buy a small slice of every stock, and hold them through thick and thin, the impact is muted when any single company falls out of bed—and they always have a stake in the market’s big winners.

Adam M. Grossman’s previous blogs include Eye on the Ball, Pouring Cold Water and  Tax Time Robbery . 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 Face Plant appeared first on HumbleDollar.

Eye on the Ball

ON THE AFTERNOON OF SUNDAY, Sept. 28, 1941, it was cool and damp in Philadelphia. Inside Shibe Park, where the hometown Athletics were suiting up to face the Red Sox, all eyes were on Boston’s 23-year-old slugger, Ted Williams. It was the last day of the regular season, and Williams’s average stood just a hair short of .400, at .39955.

According to baseball’s official rules, this would have rounded up to an even .400 in the record books, putting Williams in elite company with Ty Cobb, Shoeless Joe Jackson and a handful of others. Williams knew this. The fans knew it. And Red Sox management knew it.

In fact, with an eye on his own legacy, team manager Joe Cronin suggested that Williams sit out the last two games of the season to avoid risking his .400 standing. But Williams refused: “I’m going to play. I either make it or I don’t. If I’m going to be a .400 hitter, I want more than my toenails on the line.”

And play he did. Over the course of that day’s doubleheader, Williams hit a remarkable six for eight. As if to punctuate the event, Williams smashed his final hit of the day high into right field, where it crashed into a loudspeaker, causing it to break into pieces.

At the end of the day, Williams’s average stood at .406, ensuring that his .400 season would be recorded by history without any qualification. Writing about Williams’s performance, Stephen Jay Gould called it “a lesson to all who value the best in human possibility.” And Williams’s record still stands today. No other player has hit .400 in the 76 years since.

What does all of this have to do with personal finance? Few of us will play in the major leagues, but I see three universal lessons:

1. Focus, practice and then practice some more. Ted Williams’s teammates noted that he was bored by discussions about defense. He was a hitter, period, and he was a perfectionist. For hours each day, Williams would practice his swing. If a bat wasn’t available, he would use a broomstick or even a hairbrush. He would arrive hours before each game and would stay after, hitting as much as he could. The lesson: Find your area of expertise and then strive for continuous improvement. Do everything you can to read about, learn, practice and deepen your skills.

2. Be strategic with your time. Microsoft founder Bill Gates likes to do the dishes at his house. He does it for a specific reason: It gives him time to think. I suspect Bill Gates never wastes time.

Ditto for Ted Williams. His eye was, literally, always on the ball. The lesson: Structure your work time so that you avoid the mundane, either through delegation or through outsourcing, and instead maximize the time devoted to what’s most important.

3. Be strategic with your education dollars. Williams was a perfectionist, but he was a perfectionist focused on polishing a specific and highly marketable skill. Similarly, when it comes to your—or your children’s—education, remember that it’s workers with specialized skills who have the easiest time in their careers, especially during recessions.

For that reason, try to make education choices that have an obvious associated career path. Yes, the liberal arts are wonderful and contribute to our society in many intangible ways. But when you’re paying close to $70,000 per year for college, you also want to be practical.

Adam M. Grossman’s previous blogs include Pouring Cold Water, Tax Time Robbery and Six Figures, Tiny Taxes . 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 Eye on the Ball appeared first on HumbleDollar.

Right on Schedule

I HAVE ADVISED MANY CLIENTS on divorce and the related tax issues. The vast majority have been women, and they generally fall into three categories.

First, there are those who strive to obtain divorces that will finally end their agony. They ask for advice on things like property transfers, deductibility of legal fees and alimony payments.

Second, there are those who are already divorced. They need guidance on how to compel their former husbands to cough up overdue payments of alimony or child support.

Not infrequently, however, there’s a third category: women going through down-and-dirty divorces that disrupt their lives in all kinds of unpleasant and expensive ways. Invariably, they tell me their husbands are hiding assets.

Lots of them want to know whether it’s worth hiring private investigators to track down the buried bling. My forthright answer: It all depends, because sleuths often charge many thousands of dollars. I then alert them to an alternative: Frequently, the means for unearthing the coveted information is tucked away in their dresser drawers.

They can glean a good part of what they need from the separate schedules submitted with the federal tax returns they filed jointly with their husbands. When they delve into those 1040s, they may discover a treasure trove of names and amounts that could considerably shorten their search for concealed assets. Here’s what I tell them to look for:

Schedule B. This schedule requires listing the names of mutual funds, brokerage companies, banks and other sources of dividends and interest. At the bottom of Schedule B are questions about the existence of foreign financial accounts and trusts.

The IRS doesn’t ask for a Schedule B from individuals who receive less than $1,500 in income from interest and dividends. Instead, the IRS tells them to list their totals for those kinds of income on the first page of Form 1040. Different rules, however, apply to taxpayers with foreign financial accounts and those involved in certain foreign trusts. They must submit Schedule B, regardless of the level of dividends or interest income.

All is not lost if there’s no listing of dividend and interest amounts on Schedule B. True, it becomes harder for a wife to discover her husband’s investments or bank accounts. Still, just listing totals of interest and dividend income on Form 1040 reveals that an ex-husband owns assets that generate interest and dividends, at least during the year covered by the return. This, in turn, gives women endeavoring to find hidden assets a starting point for their quest.

Schedule D. This discloses capital gains and losses from sales of fund shares, individual stocks and other assets. Let’s say his Schedule D reports profits or losses from sales of some stocks. The details of the sales establish that he owned and unloaded those shares. What did he do with the sales proceeds—and what other investments does he own?

Schedule E. Here, taxpayers disclose income or losses from the following sources: rental real estate (including the type and location) and royalties; estates and trusts; and partnerships and S corporations. S corporations are companies—taxed much the same way as partnerships are—that pass profits or losses through to their shareholders, who pay taxes at their own individual rates.

Suppose Schedule E reveals rental income. It might be worthwhile to drop by the property. Ditto when there’s partnership or S corporation income: You might track down the outfit in question and ascertain whether it continues to generate income for the dear ex-spouse in question.

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 No Substitute, Rendering Unto Caesar and Check Him Out. This article is excerpted from Julian Block’s Tax Tips for Marriage and Divorce, available at JulianBlockTaxExpert.com. Follow Julian on Twitter @BlockJulian.

The post Right on Schedule appeared first on HumbleDollar.

Life Lesson

A COLLEGE EDUCATION BOOSTS a graduate’s lifetime earnings by an average $1 million. But at what price? There’s mounting evidence that young adults with hefty student loans put less in retirement accounts, are slower to buy homes and are even postponing marriage. Will your college-bound kids need to take out loans? It’s time to have the talk—about how much debt makes sense, given their likely career earnings. That’s the topic of my latest client letter for Creative Planning, where I sit on the investment committee and advisory board.

The post Life Lesson appeared first on HumbleDollar.

This Week/March 25-31

BUY THE BIG THREE. The global market portfolio consists of four major sectors, roughly equal in size: U.S. stocks, U.S. bonds, foreign shares and foreign bonds. Arguably, foreign bonds are optional, offering modest yields but wild currency swings. The other three sectors, however, are crucial to a diversified portfolio. Do you have enough exposure to all three?

The post This Week/March 25-31 appeared first on HumbleDollar.

Pascal’s Retirement

LIFE MAY HAVE BEEN NASTY, brutish and short at one time, but it sure isn’t today. Thinking ahead to retirement? Forget the famous quote by 17th century English philosopher Thomas Hobbes—and ponder the famous wager suggested by 17th century French philosopher Blaise Pascal.

As Pascal saw it, it’s rational to believe in God. If you believe and it turns out God doesn’t exist, the price is modest: an hour lost from every Sunday morning and a little less immorality. But if you don’t believe and God does indeed exist, the price is considerably higher: an eternity roasting in hell. In other words, we should focus less on the odds of something happening and more on the consequences—and, for Pascal, that was a slam-dunk reason to believe in God.

That brings us to retirement. While we can’t calculate the odds of God existing, we can calculate the odds of reaching retirement age—and it’s pretty easy to imagine the dire consequences if we aren’t financially prepared.

According to the National Center for Health Statistics, there’s an 88.7% chance of a newborn reaching age 60, based on 2014 mortality rates. Nothing nasty, brutish and short about that. Meanwhile, a penniless retirement may be less grim than an eternity in hell, but it isn’t exactly a cheery thought.

In short, not only are the odds of reaching retirement age extraordinarily good, but also the consequences of not saving are extraordinarily bad. If Pascal was still kicking around, you have to imagine he’d be a big advocate of fully funding a 401(k).

And yet most Americans are pitifully ill-prepared for retirement. A 2015 government study found that 52% of households age 65 to 74 have no retirement savings. For this group, the median income is $29,000, most of which comes from Social Security.

It’s important to have compassion. Some portion of this 52% will have had lives beset by ill-health, low incomes, frequent bouts of unemployment and just plain old bad luck, and their failure to save for retirement is understandable.

But others surely could have saved. Why didn’t they? At issue is a battle all of us wage every day. We know it’s better for our future self if we eat less, save more, drink less and exercise more, and yet we find ourselves slumped on the couch, chugging beer, eating Cheetos and shopping online.

Think of your worst weaknesses—and, yes, we all have them—and imagine the consequences if you gave into them not just today, but every day for years to come. It isn’t a pretty picture, right? But all too frequently, that’s exactly what happens. We promise we’ll behave better tomorrow, but that better tomorrow often never arrives.

What to do? Somehow, we need to make ourselves care more about our future self, so we’re less tempted to slip today. When it comes to retirement, that means thinking of all the great things we might do with the freedom that retirement offers—and pondering how dreadful it would be to spend those years pinching pennies and dragging our tired bodies to jobs we wish we could quit.

Indeed, there’s evidence we care more about our future self if we’re pushed to imagine the person we will become. For instance, experiments have found that if folks are shown what they might look like at retirement age, they’re inclined to spend less today and save more for tomorrow. Interested in trying this yourself? Check out your future self with a site like ChangeMyFace.com or in20years.com—and remember there’s almost a 90% chance that one day you’ll be that person.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook .

The post Pascal’s Retirement appeared first on HumbleDollar.

ObliviousInvestor.com

IN MY NERDY PERSONAL FINANCE WORLD, there are perhaps two dozen folks I pay close attention to—and one of them is Mike Piper, the blogger behind ObliviousInvestor.com. He’s also written nine books in his “made simple” series, which offer great primers on financial subjects like taxes, Social Security and retirement, all in 100 pages or less.

An accountant by training, Piper brings his analytical mind and detailed knowledge of government rules to the topics he tackles. I recently spent time with him at a conference organized by another website, WhiteCoatInvestor.com, and came away with four intriguing insights:

1. Are you pondering early retirement—but worried what it will mean for Social Security? Your monthly benefit will be based on the 35 years during which you had the highest earnings. In 2018, the maximum earnings subject to the Social Security payroll tax is $128,400.

But Piper says that, to get a healthy benefit, you don’t need 35 years of super-high earnings. Instead, you might aim for 20 to 21 years. “That’s the sweet spot,” he says. “After 20½ years, there’s diminishing returns. If your earnings are less than the maximum, the point of diminishing returns will kick in later. How much later will depend on how much less than the maximum you earn.”

2. Retirees should aim to keep themselves in the same marginal tax bracket throughout retirement, Piper says. That means thinking carefully about which accounts to pull income from each year, because withdrawals might trigger income taxes, capital-gains taxes—or perhaps no taxes at all.

Piper notes that, for those who retire before they’re eligible for Medicare at age 65, there’s an additional consideration: As they ponder their annual tax bill, they should factor in the potential federal tax credit toward insurance purchases through one of the health care exchanges. That credit is available if their income equals 400% or less of the federal poverty level. In most states in 2018, that means household income of $48,560 for single individuals and $65,840 for couples.

3. What’s the best strategy for drawing down a portfolio in retirement? It’s a topic that’s endlessly debated. But Piper offers a simple two-part strategy.

First, delay Social Security until age 70 to get the largest possible benefit, while drawing on other savings to cover your expenses until then. Second, once you reach age 70, find out the percentage of your retirement account that the government requires you to withdraw each year, otherwise known as the RMD, and then apply that percentage withdrawal rate to all your savings, not just retirement accounts. The strategy got a thumbs up in a recent study by three well-respected retirement experts.

For instance, at age 78, the RMD is typically 4.93% of your beginning-of-year retirement account balance. (To find the percentage, divide 100 by the distribution period for your age.) If your investments have had a rough time over the prior year, the required dollar withdrawal would be reduced.

“Something that adjusts for investment performance is a good idea,” Piper argues. “It also adjusts for changing life expectancy,” with the percentage withdrawal rate increasing as you age.

4. Many financial experts fret endlessly over precisely how much to invest in small-cap stocks, real estate investment trusts, emerging markets and other market sectors. But Piper says he worries far less about such things these days, in part because he feels it distracts from more important issues, such as minimizing taxes and proper estate planning.

In fact, Piper’s entire retirement savings are in Vanguard LifeStrategy Growth Fund, which offers a globally diversified index-fund portfolio in a single mutual fund. You can open an account with $3,000 and the fund charges a slim 0.14% of assets per year, equal to 14 cents for every $100 invested.

“Obviously, there are plenty of people who don’t spend enough time on their portfolio,” Piper says. “But there are also plenty of people who get lost in the minutiae. Once you have a decent low-cost diversified portfolio, you should probably spend your financial planning time on other topics.”

Follow Jonathan on Twitter @ClementsMoney and on Facebook.

The post ObliviousInvestor.com appeared first on HumbleDollar.