Jonathan Clements's Blog, page 421

Deserved More

EVERYDAY AMERICANS may struggle to be honest about their finances. But that hasn’t been a problem here at HumbleDollar.

As 2017’s first half draws to a close—and HumbleDollar marks its six-month anniversary—I’ve been looking back at which blogs garnered a healthy readership and which were overlooked. Below are five blogs that, I believe, attracted far fewer readers than they deserved.

In HumbleDollar’s blogging guidelines, I specify that writers should focus on financial issues they’ve personally grappled with. The five blogs below admirably fulfilled that requirement. Indeed, in these articles—as well as in other blogs that HumbleDollar has published over the past six months—I’ve been impressed by how open and forthright folks have been about their finances.

Home Economics
From Half to Whole
Better Than a Bike
Talkin’ ‘Bout My Generation
Lessons Learned

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To Buy or Not to Buy

FOR MORE THAN 20 YEARS, I was a homeowner. Like most people, I had a love-hate relationship with the houses I owned. I loved building home equity in the two fixer-uppers I lived in. I loved knowing my mortgage payment would stay relatively constant from year to year. But I never enjoyed yardwork and I hated dealing with unexpected repairs, including replacing an aging sewer line in one house—to the tune of $10,000.

After I got divorced, I opted to rent an apartment instead of buying another home. My decision was due, in part, to Portland’s frenzied real estate market. Housing prices in Portland have been rising at a rapid rate over the past few years and I’d be hard-pressed to find a home—even another fixer-upper—within my price range.

These days, I find myself wondering whether I’ll become a homeowner again, once I retire, or if I’ll remain a renter. I can see benefits and downsides to both.

Down payment: I have about $50,000 set aside to serve as a down payment if I choose to buy another home. If I decide to continue renting, that money would provide me with an additional pool of funds to draw from in retirement.

Staying put: Most rent versus buy calculators suggest buying a home is only financially beneficial—compared to renting—if the buyer remains in the house for at least five to seven years. As a renter, I’d be able to move without having to worry about paying realtor fees and other selling-related costs.

Mortgage payments: Every year, I’m subject to rent increases. While these increases have been modest—at least by Portland standards—they still eat up the annual cost-of-living increases I receive each year in my job. Having a fixed-rate mortgage would help keep my monthly housing costs fairly stable.

Freedom of choice: If I was a homeowner, I wouldn’t have to contend with lease restrictions. As a dog lover, it can be difficult to find a rental unit that allows pets, and units that accept dogs often come with restrictions on size and breed.

Yardwork and maintenance: Living in a rental unit means I don’t have to worry about chores like lawn mowing and general home maintenance. I’m also protected from unexpected, costly repairs that inevitably come with homeownership.

There are other considerations I’ll need to think through as I get closer to retirement. It may be difficult to get approved for a mortgage once I’ve stopped working fulltime. On the other hand, I might relocate to an area where housing is substantially less expensive and be able to pay cash for a small home. Which way am I leaning? Ask me in 10 years.

Kristine Hayes is a departmental manager at a small, liberal arts college in Portland, Ore. Her previous blogs include Quitting Early, Social Insecurity  and  Site Seeing (Part II) .

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Know Thyself

WE MAKE ALL KINDS of financial errors, but three mistakes loom especially large: We use money in ways that hurt our own happiness, we derail our portfolio’s performance, and we spend too much and save too little. Why do we make these mistakes? Here are five things we need to remember about ourselves:

We’ll never be satisfied
We’re social creatures
We are too focused on today
We’re overconfident
We hate losing

In many situations, these traits can be enormously helpful. But when handling money, they can lead us badly astray. Want to learn more? Check out the five new sections I recently added to HumbleDollar’s online money guide.

I continue to update and revise other sections of HumbleDollar’s online guide. I recently updated all the numbers in the section devoted to the stock market, including data on the market’s economic underpinnings and historical valuations. I’ve also added new pages devoted to high-yield bank accounts, measuring volatility and why actively managed funds falter.

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Not a Good Time

IT WAS APRIL 29, 2009. My 12-hour workday had already begun when, at about 4:30 a.m., I received the call from Jonathan, my younger brother. He never calls at that hour. In fact, we never phone without first texting each other to determine the best time to talk. I sensed bad news and sure enough it was. Our father had been killed 36 hours earlier while riding his bicycle. In the months that followed, it would be my responsibility, along with my twin brother, to fulfill the wishes of our father.  We were the executors of Dad’s will.

Along with the sudden loss of my father and managing Dad’s estate, there was a confluence of other events which made 2009 one of the most challenging years I have faced. At my landscaping company, we—like many others—were dealing with the fallout of what came to be known as the Great Recession. I was still going through treatment for thyroid cancer. My partner’s mother was battling an illness from which she would pass away just months after my father.

There are things you can set aside for later. But my twin brother and I could not let our company fail—it was our lifeblood. Treatment for cancer can’t wait. And I needed to provide support for my partner. Somehow, with all this, I also needed to fit in the role of being executor.

I took the task seriously. My brother and I were responsible for ensuring that Dad’s estate was settled properly and that his wishes were followed. In a matter of days, I joined my siblings and mother for the drive to my Dad’s home in Key West, Fla. Walking into my father’s house was difficult. Lying ahead for me and my family were not just the grieving process, but also what seemed the insurmountable task of sorting through Dad’s personal affairs. Dad’s will, trust and other financial papers were reasonably easy to find in his house. Balancing his check book, which had gone awry because of his Parkinson’s disease, was not so easy. On this same visit, my family met with Dad’s estate attorney. The process of getting Dad’s estate settled was about to begin in earnest.

During the next several months, I set aside time as needed to handle paperwork for Dad’s estate. I looked on it more as a business. For the most part, it wasn’t personal. Piece by piece, various aspects of Dad’s estate were settled. The estate attorney handled the probate process. While he and his staff did a lot of the legwork that was required, I am quite certain the hours involved didn’t justify the outrageous fee that was charged. The same goes for the attorney who handled claims for accidental death. Taking 33% of the insurance payout, for what I am sure entailed a few phone calls, was even more outrageous.

The decision over whether to sell Dad’s house was perhaps the most difficult. Florida was one of the states hit hardest by the mortgage crisis. Home values had plummeted 50%. The cost of maintaining Dad’s house was not inexpensive. Insurance alone ran into the thousands because of the requirement for wind and flood insurance. It quickly became clear to my siblings that selling Dad’s house was for the best. In a relatively short amount of time, a buyer came along with what seemed a reasonable offer. With the gut feeling that another buyer may not turn up soon, we accepted the offer. The settlement process was relatively painless.

One by one, I paid off Dad’s debts. After the more significant ones had been taken care of, I started to write checks to the beneficiaries named in Dad’s will and trust. As each month passed and as it became clear we were coming to the end of settling Dad’s estate, I felt a sense of relief. Closing the checking account for Dad’s estate was my final act. I had fulfilled my duty.

Death never comes at a good time.  Writing this piece for HumbleDollar required me to look back through various files that I have, because so much of 2009 and 2010 remain a blur. Thinking back on that time, I wonder how I ever coped with all that was going on. Treating Dad’s estate as a business undertaking likely helped me through. Had I taken it personally, the emotional toll would have been too much.

Nicholas Clements is one of Jonathan’s older brothers. Their father would have turned age 84 today. Nick is retired and lives just outside Washington, DC. His previous blogs include Opening My Wallet, Talkin’ ‘Bout My Generation  and  Retire to What?

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This Week/June 25-July 1

CREATE A WISH LIST. Want more happiness from your dollars? Write down the major purchases you’d like to make in the next few years—perhaps a car, vacation or kitchen remodeling. Regularly revise the list, keeping only items you’re still enthusiastic about. Result: You’ll likely make wiser spending decisions—and you’ll enjoy a long period of pleasurable anticipation.

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Precautionary Measures

INVESTMENT CONTRARIANS are having a good year—but not a great one. In 2016, U.S. stocks outpaced foreign shares, smaller companies outperformed their bigger brethren and value stocks beat growth stocks. In 2017, all those roles have been reversed, with foreign shares, big-cap stocks and growth companies topping the performance charts.

For those of us who like to see the mighty fall and the downtrodden lifted up, this has been quite satisfying, except for one small issue: Even as the stock market’s leadership has changed, the market itself has continued to charge ahead. I try to avoid having any opinion about the market’s short-term direction. But after eight years of rising prices and given today’s lofty valuations, it wouldn’t be surprising to see share prices decline—and yet stocks keep barreling ahead.

Initially, I assumed the so-called Trump Bump reflected optimism that the U.S. corporate tax rate would be cut and that we would see massive infrastructure spending. Neither, however, appears close to becoming reality, but that hasn’t stopped share prices from climbing. Are stocks soaring simply because there’s an excess of capital sloshing around the global financial markets and no other asset class appears attractive?

It’s baffling—especially given all the reasons to worry. Back in March 2016, I wrote that investors faced four key questions: Is the economy slowing? Will profit margins shrink? Has capital spending been neglected? Are valuations permanently higher? All four questions are still relevant today.

The economy remains sluggish—and that isn’t good for corporate profits. After adjusting for inflation, the U.S. economy expanded 1.6% in 2016 and at a 1.2% annual rate in 2017’s first quarter. No doubt faster growth is possible, but we shouldn’t expect too much.

Why not? Historically, half of the economy’s roughly 3% average annual growth rate has come from increasing the number of workers and half from raising the productivity of all workers. But with the labor force growing at just 0.5% a year, rather than at its historical rate of 1.5%, we should probably expect 2% growth, not 3%.

Moreover, there are increasing concerns about the other component of economic growth: productivity. Increases in output per hour have averaged 0.5% a year over the past six years, versus an average 2.4% over the prior 20 years.

“Forget trying to guess the market’s short-term direction and instead focus on risk. Today, three risks loom especially large.”

Meanwhile, profit margins remain fat by historical standards. After-tax corporate profits currently stand at 9.1% of GDP, below 2012’s 10.8% peak but still well above the 50-year average of 6.5%. With unemployment at 4.3%, employers may need to increase wages to attract and retain workers, and that could put pressure on profit margins.

What about capital spending? Is it being neglected? This one is harder to assess. It seems companies are weighing two competing uses for their cash: They can invest in their business—or they can invest in their own stock.

Lately, the latter has been the clear priority. For more than a decade, companies have devoted huge sums to buying back their own shares. That suggests they see no reason to lavish their excess cash on capital spending, perhaps viewing it as unnecessary, given today’s lackluster economic growth and tepid consumer demand.

Finally, valuations grow ever richer. By almost any measure—dividend yields, price-earnings ratios, cyclically adjusted price-earnings ratios, Tobin’s Q—U.S. stocks appear expensive.

So where does that leave us? We have slow economic growth and hence slow growth in corporate profits. We have fat profit margins that could narrow. We have corporations that prefer to buy their own stock rather than invest in expanding their business. And we have valuations that look mighty rich.

This, of course, tells you absolutely nothing about the U.S. stock market’s short-term performance. I could have presented similar arguments last year and the year before that—and, indeed, did so.

What to do? Forget trying to guess the market’s short-term direction and instead focus on risk. Today, three risks loom especially large.

First, there’s the risk we could get a sharp market decline. If you have money you’ll need to spend within the next five years, it should be out of stocks and invested in nothing more adventurous than high-quality short-term bonds.

Second, there’s the risk that the market rally has left you with more of your portfolio in stocks than you intended. Consider rebalancing back to your target portfolio percentages.

Third, there’s the risk you’ll end up amassing less for retirement and other long-term goals than you had hoped, because stock returns over the next decade prove disappointing. Worried that rich valuations will mean low returns? As always, your best defense is a healthy savings rate.

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Seller’s Remorse?

AS I PREPARE TO MOVE FROM PHILLY to Boston this summer, I’ve struggled with how to handle my home. Do I sell the place and pocket the profit—or keep it as a rental property for future income and price appreciation? A quick Google search provides plenty of good reasons to choose either option. But when making a decision of this magnitude, what really matters is your personal situation—and that prompted me to sell. Here are my five reasons:

The financial benefits of renting don’t outweigh the costs. I could probably rent my house for $500 a month more than my mortgage. But all it would take is a few months with no tenant to leave me in a financial hole.
Over time, greater maintenance spending will be necessary. I’ve been lucky to avoid significant repairs on my air conditioning, water heater and major appliances in the seven years I’ve lived in the house. But all these systems will eventually require work.
I don’t have the time to do it right. I currently find it challenging to schedule maintenance work and find high-quality, trustworthy contractors. I know this will be exponentially harder when I’m living a plane flight away and still working fulltime. The same goes for finding and screening trustworthy tenants. I considered having a close friend manage the property, but that means mixing my friends with my money. That’s usually not a great move—and it would reduce my profit margin.
The market is in the right place. My neighborhood has been rapidly expanding and developing over the last seven years, as larger homes nearby dwarf mine and new retail and restaurant space sprout up close by. I might make more if I held onto the place for even longer and the surrounding area continued to improve. But my home has some limitations—small kitchen, limited closet space, overall low square footage—that will prevent it from ever commanding top dollar. Furthermore, I’m trying to remember that the ever upward feeling that exists in the market now can quickly change. It feels right to lock in my profit while low mortgage rates buoy property prices and my house is still in good condition.
I’m sick of owning. I’ve written about the challenges of owning a home before. I’m excited about getting to call a landlord when something goes wrong and locking in a two-year lease, with no worries that I’ll be hit with a big increase in property taxes or homeowner’s insurance premiums.

I’m sure I could list just as many reasons I shouldn’t sell. Part of me wishes I could keep the place, because I’m so emotionally invested in my house and what it represents. But selling now will allow us to buy another home someday—and that flexibility is priceless.

Zach Blattner’s previous blogs include Too Trusting and  Land Grab . Zach is a former teacher and school leader who now teaches teachers across the Philly/Camden region as a faculty member at Relay GSE. He is a self-taught finance nerd who dispenses advice to his wife, friends, family and anyone else willing to listen.

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Leaving Home Ain’t Easy

SHOULD YOU MOVE when you retire? The numbers can be compelling—especially if you’re like my wife and me, and you live in New York City or one of its surrounding suburbs, where living costs are absurdly high. This was hammered home by the cost-of-living calculator cited by Kristine Hayes in her blog yesterday.

I discovered that, by leaving New York, we could cut our living expenses by almost 60% if we moved to Bismarck, N.D., Dodge City, Kan., or Grand Junction, Colo. Boston, Los Angeles, San Diego, Seattle and Washington, DC, would all be cheaper by 35% or more. San Francisco was a tad less enticing, but still 22% less costly. Even notoriously expensive Honolulu looks like a relative bargain, at 17% cheaper. These figures are for someone moving from Manhattan with a $100,000 income. Those moving from outside Brooklyn or the New Jersey suburbs wouldn’t save quite so much, and in some places they’d find themselves paying more.

Much of this is driven by housing costs. For many folks in our area, retirement planning seems to consist of buying an overpriced New York home and then, upon retirement, trading down to cheaper Florida real estate. The home equity that’s freed up thereafter pays for air conditioning and early bird dinner specials.

All this might sound like great news. Lucinda and I have endless retirement possibilities that promise great financial savings. Problem is, we aren’t interested. We’re happy where we are, with our children relatively nearby, a network of friends we wouldn’t want to lose and a great apartment we’d hate to give up.

In short, we live in an area of the country where—even with a good salary—it can be a struggle to save for retirement, because living costs are so high. And the struggle is even greater if you want to stay here in retirement, because you need a supersized nest egg.

None of this is designed to elicit sympathy, let alone a flurry of charitable contributions. Lucinda and I are doing fine. Still, I now realize that we have inadvertently bought the sort of luxury good that I regularly warn readers against. Whether it’s first class air travel, European sedans or living in New York, there’s a fundamental problem with luxuries: Once you have grown accustomed to them, they’re awfully hard to give up.

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Quitting Early

I CELEBRATED MY 50TH BIRTHDAY a few weeks ago. Since then, I’ve found myself spending a lot of time thinking about numbers. Specifically, I’ve been musing about when I might be able to retire from my current fulltime job. Age 55, 58, 62? Or will it need to be later?

Several studies suggest the age at which most people leave the workforce has been steadily rising over the past several decades. This is likely due, in part, to folks living longer, having insufficient money saved for retirement and an increase in the age at which people are eligible for Social Security benefits. While the term “early retirement” is sometimes reserved for those who leave the workforce before reaching 65, the average retirement age for women is currently estimated to be 62, while for men it’s 64.

For the past few years, I’ve been planning my exit strategy. Each year, around the time of my birthday, I reevaluate and update my plan. Here are some of the key variables:

Health coverage. I’m fortunate to have qualified for a unique early-retirement health care benefit offered through my employer. If I leave my job after I turn age 55, I can maintain my current health insurance coverage until I’m eligible for Medicare at 65. My employer will continue to cover the cost of my insurance premiums until I’m 65 and, after that, it’ll make contributions towards the cost of any Medicare supplement plan I choose.

Social Security. I’ve been working fulltime since age 25 and part-time for six years before that. Because Social Security benefits are based on a worker’s highest 35 years of earnings, I’d receive a higher monthly benefit if I continued to work fulltime until age 60.

Retirement account earnings. This is the biggest question mark. The current value of my retirement portfolio is about $280,000. I will also be eligible for a small pension. Until I leave my job, I’ll continue to contribute approximately 25% of my salary to my employer’s retirement plan, in addition to the 10% contribution my employer makes. Depending on how the stock market performs—I currently use an estimated return of 6% a year—I should have a substantial nest egg to draw from within a few years.

Cost of living. Once I leave my job, I plan on moving to an area with lower housing costs than Portland. I use an online cost-of-living calculator to estimate how much less it would cost me to maintain my current lifestyle. Depending on which part of the country I move to, my cost of living could be 25% lower.

While I still don’t know exactly when I’ll leave my 9-to-5 job behind, having a plan allows me to analyze my options—and gives me something to aspire to.

Kristine Hayes is a departmental manager at a small, liberal arts college in Portland, Ore. Her previous blogs include Social Insecurity and Site Seeing (Part II) .

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This Week/June 18-24

TRIM YOUR CHECKING ACCOUNT. If there were a guaranteed way to earn an extra one percentage point a year on your investments, you’d jump at the opportunity. So why would you leave excess cash in your checking account, where it likely isn’t earning interest, when that money could be in a high-yield savings account earning 1% a year or more?

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