Jonathan Clements's Blog, page 418

This Week/March 18-24

SAVE SOME FOR YOUR FUTURE SELF. Looking to lose weight? At restaurants, transfer half your serving to a second plate and ask the waiter to box it up. If the food will make good leftovers, it’s easy to do, because you know you’ll have a treat tomorrow. Want to save more? Think about it the same way—and set aside some of today’s spending money for tomorrow.

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The Unasked Question

WHEN WE MAKE FINANCIAL DECISIONS, we usually have a pretty good idea what we’re getting. But what are we giving up? That, I believe, is the crucial, unasked question.

Think about any financial choice, whether it’s the shoes we buy, the stock we purchase or the kids’ college degree we promise to pay for. All too often, these are snap decisions. Captivated by the bright shiny object in front of our eyes, we make an isolated choice—and fail to grapple with the bigger picture.

How can we improve our decision-making? It starts with hitting the pause button, so the slower-moving contemplative part of our brain gets a chance to wrestle with the faster-moving instinctual part. And during that pause, we should ask ourselves: What am I giving up?

If we splurge on the new shoes, we’ll have less money to spend on other items, either now or at some future date. If we purchase a stock, there’s a world of investments we’re effectively choosing not to buy. If we pay our children’s college costs, we’ll have fewer dollars for other goals, notably retirement.

Even if we ask about the tradeoff involved—or what economists call the opportunity cost—there’s no guarantee we’ll make the right choice. Often, acting on our first impulse is simply too alluring. But at least asking the question forces us to consider the issue, however briefly, and maybe we’ll have the presence of mind to weigh the alternatives—and perhaps even summon the willpower to choose a different path.

As we mull those alternatives, there’s a slew of additional questions we should ask, including how the decision will impact our happiness, what it’ll cost and what risks are involved. I would also ponder a question that isn’t asked nearly enough: Should the choice prompt me to make other financial changes?

This question doesn’t always come into play, because not every decision reverberates across our finances. Still, those reverberations can come back to haunt us, so it’s a crucial consideration.

For instance, if we dump a bunch of money in a new mutual fund, we may end up with too much exposure to one part of the market, especially if our new fund has a similar mandate to others we already own. If we buy a house, we may need a larger emergency fund to cover any unexpected expenses, and perhaps more life insurance so our family could pay off the mortgage if we died. If we quit our job to launch our own business, we’ll likely need to buy our own health insurance and maybe purchase disability insurance as well. We may also need to think anew about our retirement savings strategy and probably keep more cash in the bank.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook .

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Tax Time Robbery

THERE’S A NEW TYPE OF FINANCIAL FRAUD on the rise: tax refund theft. All an identify thief needs are an individual’s name and Social Security number. This information, unfortunately, is readily available. In a single incident in 2017, thieves stole information on almost half of all Americans from credit reporting agency Equifax.

Using this information, thieves then prepare and file a fake tax return in such a way that it appears a large refund is due. This fake tax return carries the victim’s real name and Social Security number, but the criminal’s address, allowing the thieves to collect their fraudulent refund check. The thieves do all of this early in the year, before victims have had a chance to file their own real return.

While it might seem difficult to engineer this sort of brazen fraud against the IRS, it turns out to be surprisingly easy. Because a taxpayer’s address and finances may legitimately change from year to year, the IRS can have a hard time distinguishing a real return from a fake. Result: Over the years, the IRS has paid out billions in fraudulent refunds.

Tax-related fraud is difficult to prevent. Still, there are some steps you can take to protect yourself. Below are four things to understand about how the IRS operates:

The IRS never emails taxpayers; it uses traditional U.S. mail. If you receive an email purporting to be from the IRS, delete it. Don’t click on any links and don’t call any phone numbers contained in the email.
The IRS will sometimes call taxpayers, but you should be wary of incoming calls. The IRS will almost always precede any call with a letter. In fact, it will normally only call when it hasn’t received a response to multiple letters. If you do receive a call from someone claiming to be at the IRS, do not feel any obligation to engage over the phone. Instead, ask the person to mail you information. Alternatively, if you prefer to resolve the question more quickly, go to the IRS’s website and call back using a phone number that you find there.
The IRS will never ask for payment over the phone by credit card. The only way you should ever pay federal taxes is with a check made out to “United States Treasury” and mailed to one of the Internal Revenue Service Centers.
In an effort to combat fraud, the IRS may send you a letter called a 5071C. This letter will ask you to confirm your identify and may itself appear to be part of an attempted fraud. If you get a letter like this, go to IDverify.irs.gov. That page will include an explanation and a phone number for you to call. To be sure you are responding to a legitimate inquiry, call only that phone number.

If you do become a victim of tax-related fraud, I recommend these steps:

Notify the IRS using Form 14039. This is an Identify Theft Affidavit and is your mechanism to formally advise the IRS of the situation. As long as you continue to file your real tax return and pay what is legitimately due, this affidavit will help you avoid any penalties that might be triggered by the thieves. In addition, the IRS will implement additional security procedures for your future tax returns.
You can also call a dedicated department at the IRS, the Identity Protection Specialized Unit. Its phone number is 800-908-4490. A representative can advise you on your specific situation.
Place a fraud alert on your credit file at the three major credit rating agencies. Also review your credit reports. With any luck, these won’t show any additional fraudulent activity, but it’s best to check.
Visit the Federal Trade Commission’s website consumer.FTC.gov for helpful information and advice. With most forms of identity theft, the largest cost to the victim comes in the form of time, energy and aggravation. Resources like this can guide you and save valuable time.

Adam M. Grossman’s previous blogs include Six Figures, Tiny Taxes, Free for All and On the Other Hand . 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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Case Closed

I’VE ALWAYS BEEN A METICULOUS record keeper. As a child, my 4-H record book often won top honors at the county fair. As an adult, my career as a laboratory manager requires me to keep detailed records about budgets, lab prep and equipment maintenance. All that recordkeeping has bled over into my personal life as well. I have drawers full of neatly-labeled file folders filled with receipts, tax returns and other personal documents.

It’s probably no surprise, then, that when I was involved in a serious car accident almost five year ago, I took a lot of notes. I’d been going 60 miles per hour on Interstate 5 when the car in front of me lost control. I was able to navigate my little Honda Fit over one lane, but it wasn’t enough. The other car slammed into me and pushed me across two more lanes of traffic before my car finally came to rest. Even though the entire incident probably lasted just three or four seconds, the details will forever be etched into my memory.

Thankfully, I wasn’t injured in the wreck. A week after the accident, my insurance company declared my car a total loss. A few days later, I had a check in hand and purchased a used car. Even though I assumed at the time that there was no reason to keep any of the paperwork related to the accident, I went ahead and filed it all away anyway.

Fast forward three years. Just a month before the statute of limitations would have run out, the other driver involved in the accident filed a lawsuit against me, claiming I was at fault and seeking a monetary award to cover some of the medical expenses she incurred as a result of the accident. I called my insurance company and was informed it would provide an attorney to represent me throughout the process.

The lawsuit dragged on for the next 18 months. I was grateful I had kept such detailed notes. I’d filed away the photos of my damaged car, provided by the body shop that had evaluated it for damage. I had the police report showing the other driver had been issued a citation at the time of the accident. I’d kept the check stub, from the plaintiff’s insurance company, showing it had paid the cost of my rental car. And I still had the original, hand-written notes I’d scribbled on a piece of scrap paper in the moments after the accident. All of that information proved invaluable as I gave my deposition and testified in front of an arbitrator.

In the end, the arbitrator ruled in my favor and the plaintiff didn’t receive any money. More important, though, I learned how critical it is to keep adequate records of various major life events, even long after it no longer seems necessary.

Kristine Hayes is a departmental manager at a small, liberal arts college in Portland, Oregon. Her previous blogs include My Younger Self, Bogleheads.org and USAFacts.org .

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NewRetirement.com

WANT TO DOUBLE-CHECK your retirement readiness? There’s a slew of online calculators available, but one of the best is NewRetirement.com. The site strives to deliver great content and foster an active community, and it does a decent job on those two fronts. But the site’s heart and soul is its super-sophisticated, comprehensive retirement calculator.

Truth be told, my preference usually runs to calculators that don’t require registration and don’t involve many inputs, so I was initially reluctant to create an account at NewRetirement.com. But I know Steve Chen, NewRetirement.com’s founder, and he cajoled me into giving the calculator a test drive.

I’m glad I did. Signing up and adding my data proved less onerous than I feared, there was no cost involved and my registration didn’t trigger an endless steam of pestering emails. Indeed, I didn’t have to add much information to get an assessment of my retirement plan.

Or maybe I should say two assessments: The site gauged my chances of a financially comfortable retirement using both optimistic and pessimistic assumptions. Things look good, though the site suggested they would look even better if I converted my traditional IRA to a Roth, downsized my home and reduced my expenses by 10%.

I figured maybe I was an easy case, so I decided to slash the value of my retirement account and my home, and see what that did to the analysis. The site suggested my top opportunity was purchasing a deferred income annuity, which would provide income starting later in retirement—and which would likely be a good move for someone short on retirement savings.

The site also suggested increasing the amount I save, which makes sense, and suggested I delay claiming Social Security. But it didn’t advise postponing retirement, which would probably be a good idea, given that I was angling to quit at 62. Along with some of its financial suggestions, NewRetirement.com offers links to the site’s product partners. But there’s no hard sell—a big plus in my book.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook .

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No Substitute

FOR REASONS THAT MAKE LOTS OF SENSE to my clients, many of them place their homes, securities and other assets in joint ownership with their spouse or children. A characteristic of joint ownership is the right of survivorship—the co-owner who dies first loses all ownership in the property and the surviving co-owner acquires all ownership.

Many individuals mistakenly believe that joint ownership relieves them of the need to write a will. To be sure, property owned jointly will pass on the death of one co-owner to the surviving co-owner, even though the deceased co-owner has left no will. Additionally, it enables them to avoid some of the costs and delays of estate administration.

Still, joint ownership isn’t a cure-all. I have a client I’ll call Elysa Blaine. I caution her and other co-owners not to focus only on the seeming advantages. In most cases, it’s inadvisable for them to use joint ownership as a substitute for a will. I mention several key caveats.

For starters, it’s difficult for Elysa to put all of her property in joint ownership. In trying to do this, she’s bound to overlook some items. The long list of possibilities includes jewelry, art collections and other kinds of collectibles.

I tell Elysa more than she’ll ever want to know about the dire things destined to happen if she spurns my advice and dies without a will. In particular, her overlooked assets aren’t going to wind up with the individuals she intended to benefit.

Instead, they’ll pass in accordance with her state’s impersonal and inflexible intestacy rules. (Intestate is the legal term for someone who dies without a will or writes one that’s invalid.) Consequently, the intestacy rules could bestow assets on individuals whom Elysa never intended to benefit or whom she considers to be less deserving of her largess than others. Those troublesome rules also kick in when two co-owners who’ve not made wills die simultaneously or under circumstances that make it impossible to determine which of the individuals was the first to die.

Another possible drawback: Elysa’s assets go directly to the survivors. With a will, she is able to control who gets how much and when, so it’s harder for surviving beneficiaries to spend their inheritance too rapidly or dissipate it unwisely. To entice Elysa and other recalcitrant clients to prepare wills, I spin yarns about beneficiaries who blew their inheritances on slow horses and fast women.

An added complication: What might happen if taxes (or other debts) are due on Elysa’s death and no funds have been set aside for their payment? This can cause trouble if her surviving co-owners refuse to cooperate.

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 Rendering Unto Caesar, Check Him Out and The Last Word. This article is excerpted from Julian Block’s Easy Tax Guide for Writers, Photographers, and Other Freelancers, available at  JulianBlockTaxExpert.com . Follow Julian on Twitter  @BlockJulian .

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This Week/March 11-17

INVEST YOUR TAXABLE ACCOUNT THOUGHTFULLY. If you purchase the wrong investments in your taxable account, you may be reluctant to sell, because you’ll trigger capital gains taxes. A good choice: low-cost U.S. and international total stock market index funds, which should be tax-efficient—and which shouldn’t ever lag far behind the market averages.

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The Tipping Point

STARTING TO SAVE is a discouraging business. Even if you invest in stocks—and even if stocks post gains—progress initially can seem agonizingly slow.

Consider a simple example. Let’s say you earn $100,000 a year. Not exactly an everyday salary, I admit, but it makes the numbers easier to grasp. You save 12% of your income, equal to $12,000 each year. That money is invested at the start of the year and earns 6% annually, which is my expectation for long-run stock returns.

After three years, you’ve socked away $36,000 and collected three years of investment gains, and yet your account balance is just $40,500. That doesn’t exactly fuel your motivation.

Still, you persist—and in year 12 something interesting happens. By that juncture, you’ve socked away $144,000 and your year-end balance is somewhat below $215,000, which means you’ve now garnered almost $71,000 in investment gains. That’s not bad. Even more impressive: In year 12, for the first time, your investment gains—at $12,146—are marginally larger than the $12,000 you socked away.

You have reached the tipping point.

I first heard this moment described by investment advisor Charles Farrell, author of Your Money Ratios, and I’ve been fascinated by it ever since. Your portfolio is now hitting on both cylinders, thanks to significant contributions not only from your own regular savings, but also from investment gains. Thereafter, your nest egg’s growth is explosive: You go from less than $215,000 at the end of year 12 to $500,000 in year 21, $1 million in year 30 and almost $2 million in year 40.

To be sure, this happy story hinges on its assumptions. What if, instead of clocking 6% a year, the stock market nosedives? As long as you keep up your regular investment program—and as long as stocks eventually recover—this could boost your portfolio’s ultimate value, as you scoop up shares at bargain prices.

We also need to factor in inflation. My expected 6% long-run annual return is built, in part, on an assumed 2% inflation rate, so after-inflation stock returns are 4%. But if we have 2% inflation, that would likely boost your $100,000 salary by a similar amount each year, while also reducing the spending power of the nest egg you amass.

Let’s imagine your salary increases 2% annually—and so, too, does the nominal amount you save. After 40 years, you would have accumulated almost $2.6 million. But all those years of 2% inflation would slash the spending power of a dollar by 55%, so your portfolio’s value—in today’s dollars—would be worth somewhat under $1.2 million.

Getting an early start, and thereby enjoying a full 40 years of compounding, was crucial to hitting that $1.2 million. What if you had procrastinated for five years, so you only saved and invested for 35 years? Instead of $1.2 million, you would have ended up with a tad over $900,000, or 22% less.

As it happens, that $1.2 million is equal to 12 times your annual salary, which is often suggested as a goal for retirement savers. If you have 12 times your income saved by the time you retire, your portfolio should be able to generate retirement income equal to roughly half your annual salary, based on a 4% withdrawal rate. Add in Social Security, get your mortgage and other debts paid off by the time you quit the workforce, and you should be set for a comfortable retirement.

Nice work, right? And all it takes is a little perseverance—through those discouraging first dozen years.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook .

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One Small Step

IN NOVEMBER 2006, I WROTE an article for The Wall Street Journal about how to get started as an investor, even if you didn’t have much money to spare. The article was read by Charlie Cutelli, a high school teacher and coach in St. Louis, Missouri.

“At the end of the article, there was a nugget about T. Rowe Price waiving the $2,500 minimum ‘if you commit to socking away at least $50 a month through an automatic investment plan’,” recalled Cutelli in an email he sent me earlier this week. “On April 20, 2007, I began dumping about $100 a month into a fund or two. As a poor teacher, I never expected to accumulate too much. But with consistent automatic investments, I finally cracked the $100,000 mark about two months ago.”

T. Rowe Price, alas, no longer waives its investment minimum for investors who sign up for automatic investment plans. Are you on a tight budget and looking to get started as an investor? Today, my top choice would be a target-date retirement fund that holds a globally diversified portfolio of index funds. That way, you minimize investment costs, get a broad mix of stocks and bonds in a single mutual fund, and avoid the high likelihood of market-lagging performance that comes with actively managed funds.

Target-date index funds are available from Fidelity Investments, Charles Schwab and Vanguard Group. Keep in mind that Fidelity and Schwab also have target-date funds that are actively managed; I would avoid those. Also note that you can use target-date retirement funds for goals other than retirement. I opened Vanguard target-date funds for my two children and two stepchildren, with an eye to helping them save for house down payments.

Schwab’s target-date index funds have no minimum, while Vanguard requires a $1,000 initial investment. Fidelity is a little steeper: You need $2,500 to open an account. Schwab’s funds charge 0.08% of assets per year, or eight cents for every $100 invested. Vanguard levies 0.13% to 0.15% and Fidelity’s fee is 0.15%. My advice: Get an account open, add $50 or $100 automatically every month—and a dozen years from now, you’ll be writing me a happy email, just like Charlie Cutelli.

Want to explore other options? If your taste runs to actively managed funds, check out the low-minimum possibilities at Artisan Partner Funds, Buffalo Funds, Homestead Funds and Nicholas Company.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook .

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Planting Seeds

ALMOST TWO YEARS AGO, I made the jump from fulltime digital publishing strategist to self-employed marketing consultant. Still, I love magazines and have always wanted to start my own media company. I just never thought it would be a site devoted to house plants.

Last year, my friend John Verdery released a book called the City Dweller’s Guide to Indoor Plants. He threw up the corresponding website CityPlantz.com, where he detailed his favorite gardening tools and linked to Amazon. If someone clicked on a link and made a purchase, he earned a commission.

When I saw the site, a lightbulb went on. I always wanted to build an editorial brand around one of my interests, like personal finance or digital marketing. But blogs that cover those topics are a dime a dozen. (No offense, HumbleDollar.) John had planted the seed for a niche blog in an underserved space. I saw an opportunity to help him grow and monetize the site.

Currently, we’re focused on long-form blog posts that help indoor gardeners solve their problems—and which should get picked up by search engines. Examples include how to grow microgreens indoors and how to propagate succulents. These posts are about 1,200 words each, far longer than the typical blog post currently ranking on the first page of Google.

The second most important driver of search traffic, beyond great content, is having other websites link back to your own. We did well out of the gate: John and his book were covered in a blog post on Huffington Post, giving us a ton of link juice from a high authority site. Still, we expect search engine traffic to really kick in three-to-six months from now.

In terms of monetizing the site, we plan on using Google AdSense to earn advertising revenue and product links to Amazon, eBay and Etsy to generate affiliate marketing revenue. This is challenging. Because of low AdSense payouts and small affiliate commissions, we’ll need thousands of visitors to our site every day to earn significant dollars. Down the line, we’ll look into ways to cross-monetize, including paid monthly memberships for private chat rooms, City Plantz-branded products and whatever else might be relevant to our audience.

Sound like a pipe dream? Perhaps. But the financial risk is small. So far, we’ve paid $450 to a developer to help build the site, $1,200 to a writer who produced six posts, and $100 on Facebook ads to capture email addresses and drive traffic. A good investment? Time will tell.

Steven Aguiar’s previous blogs include Chasing Points, Site Seeing (Part I) and  Small Changes, Big Dollars . Steve is the founder of  BlueWing,  a B2B digital marketing agency. He majored in Economics and Hispanic Studies at Brown, and is a big fan of compounding interest.

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