Jonathan Clements's Blog, page 422

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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Hard Choices

FINANCIAL ASSETS can seem like mere numbers on an account statement, especially at times of stock and bond market turmoil. But hard assets feel more substantial: Your home, artwork and gold coins have a comforting physical presence.

But are they good investments? I’ve been perusing Financial Market History, a collection of essays edited by David Chambers and Elroy Dimson. The paperback costs $38.95 from Amazon, but the Kindle edition is available for free. I was particularly intrigued by the chapter from academic Christophe Spaenjers, which is devoted to the long-run return from durable assets.

According to Spaenjers, between 1900 and 2014, U.S. home prices rose an average 0.3% a year more than inflation, versus 6.5% for stocks and 2% for bonds. This isn’t as grim as it seems, because the housing number includes only capital gains—and thus excludes the rent that a landlord might receive. After costs, that rental income might be worth an additional 5% a year.

Of course, if you occupy your own home, you won’t receive that rental income, because you’re effectively renting to yourself. This imputed rent is still valuable—and likely worth more than the price appreciation that many homeowners obsess over.

Next, Spaenjers focuses on collectibles. Since 1900, art has climbed 2.2% a year more than inflation, stamps 2.9%, wine 4.1% and violins 2.7%. This data is mostly based on U.K. sources.

These figures trail stocks, but they outpace bonds—and are higher than I would have guessed, especially because they don’t reflect the “emotional yield” that collectibles deliver to their owners. Still, Spaenjers notes these figures ignore transaction costs, which can exceed 25% on a roundtrip trade. Also, there would be storage and insurance issues (though these are already reflected in the return for wine).

Finally, Spaenjers turns his attention to high value natural resources, calculating that since 1900 we’ve had a 0.7% annual real return for gold, 0.1% for silver and 0% for diamonds. Those modest returns were coupled with fairly high volatility.

Folks, of course, buy collectibles because they enjoy owning them and purchase homes to live in. But what if you’re buying durable assets to diversify a portfolio that’s invested in stocks and bonds? Almost all durable assets are illiquid, so don’t bank on selling them quickly. Moreover, most of the assets that Spaenjers analyzed were positively correlated with the stock and bond markets, meaning they tended to rise and fall in sync with the financial markets. The exceptions were gold, which is easily traded and has proven to be a great diversifier, and to a much lesser extent silver.

The implication: You might allocate a small piece of your savings to gold if you want to calm down a portfolio that’s largely invested in stocks and bonds. Want to turn that negative correlation into added investment gains? You need to set a target portfolio percentage for gold—maybe 2%—and then regularly rebalance back to that 2% target, so you’re compelled to buy low and sell high.

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Playing Your Cards

YOU’VE PROBABLY ALREADY ASKED yourself this question: Is it better for my credit score to have just one credit card—or many?

There’s no magic number, because it isn’t really about how many credit cards you have. Rather, what matters is your financial situation and how you handle your cards. For example, if you are just beginning to build a credit history, it’s best to have a single card. Try to follow three rules:

Pay your bills on time—and avoid late payments at all costs.
Keep the balance on your card as low as possible.
Don’t apply for a new credit card until you need it.

If you follow these rules, you will be on track for a good credit score. If you are also paying a student loan, car loan or mortgage on time, you’ll further prove to lenders that you’re a responsible borrower.

This good behavior will appear on your credit report and help raise your credit score. With a single credit card, it’s difficult to establish a robust credit history, so you might eventually request a second card and perhaps more.

Is it possible to have too many cards? For people with high-paying jobs, it’s common to have multiple credit cards. When those cards are used wisely, these folks can end up with a FICO score that’s well over 700 and perhaps above 800. A low score, by contrast, is usually anything below 640.

In other words, you can have many credit cards and not ruin your credit score. Instead, what matters is keeping your balances low in relation to the credit limits you have. This is called the credit utilization ratio. If you charge expenses on several cards, but have a low total balance, you’ll probably earn a high credit score.

To be sure, your score can dip when you request new credit cards. But if you have a long history of regular loan and credit card payments, asking for another card should have little or no impact. Want to see what your credit reports look like today? You can request free copies of your reports from the three major credit bureaus by heading to AnnualCreditReport.com.

George Diaz writes for finance sites MyFinancialWisdom.com and Sobredinero.com . He holds an MBA, is a digital media professional and loves writing. George can be reached at george@sobredinero.com or on Twitter @sobredinero1

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Site Seeing (Part IV)

WHEN I WAS IN GRADUATE SCHOOL, racking up my fair share of student debt at 6.8% interest, I knew I needed to get serious about financial education. I was studying finance, but had yet to encounter a personal finance class. It became my mission to filter through the endless websites and blogs to find what resonated with me. Here are my five go-to sites:

Ramit Sethi’s I Will Teach You to be Rich, both the book and blog, offered a wealth of information when I needed it most. Ramit likes to refer to himself as your surrogate Asian father, and he means business. Don’t let his blog’s name fool you. Every 20-something should visit the personal finance section of his site. Money mistakes, the importance of automation, investing and eliminating debt are topics covered.

In 2012, I read an article talking about a new financial website, NerdWallet.com. As a self-proclaimed financial nerd, I immediately became interested. The credit card tools and analysis first drew me in, but I soon realized the website offers considerably more than that. The site has some of the best financial tools anywhere to help people make financial decisions. I’ve had the pleasure of personally meeting several of the nerds behind the site. They’re bright, passionate and on a mission to streamline good advice.

Richard Thaler, a pioneer in behavioral economics, has captivated me through his work. His most recent book and associated website, MisbehavingBook.org, offer a fresh perspective, helping readers to make better decisions. I’ve developed a slight brain crush.

When you’re a nerd, you welcome opportunities to continually grow and develop. MrMoneyMustache.com does not disappoint. MMM lives an extremely optimized frugal life, retiring at age 30. His simple, unconventional lifestyle and approach to money is refreshing. You may have no plans to ditch your car for a bike, but his concepts are sure to leave you thinking.

Podcasts have yet to speak to me, unless you’re financial journalist Farnoosh Torabi of So Money. Her blog contains great advice, including the importance of asking questions and the notion that no one cares about your money as much as you do. Torabi’s content and brand have evolved throughout the years to reflect her personal journey.

This is the fourth in a series of articles devoted to the favorites websites of HumbleDollar’s writers. The earlier articles appeared May 23, May 29 and June 6.

Anika Hedstrom’s previous blogs were Upping the Ante and Home Economics. Anika is a financial planner with   Vista Capital Partners   in Portland, Ore. She loves to nerd-out and, when given a dollar, will save 96 cents.

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This Week/June 11-17

WRITE IT DOWN. Want to spend less, drink less coffee or booze, eat less or exercise more? Keep a diary devoted to one or more of these things. For instance, if you write down every dollar you spend, you won’t just have a better idea of where your money goes. You’ll also be more conscious of when you’re spending—and that by itself will prompt you to cut back.

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The Good, the Bad and the Ugly

EVEN BAD FINANCIAL PRODUCTS and strategies turn out okay for some investors. If that wasn’t the case, they probably wouldn’t attract enough customers to survive, no matter how aggressively they’re peddled. Still, some are so risky or so costly that the chances of a happy outcome are slim. Want to improve your odds of financial success? Here’s how I would categorize the products and strategies on offer today:

Dangerous

Buying stocks on margin
Leveraged exchange-traded index funds
Day trading
Short selling
Writing naked call options

Dubious

Cash value life insurance
Variable annuities
Equity-indexed annuities
Hedge funds
Market timing
Options trading
Structured products
Load funds
Unit investment trusts
Closed-end funds bought at the initial public offering
Brokers on commission

Proceed with Caution

Actively managed funds
Individual stocks
Bonds bought in the secondary market
Closed-end funds at a discount
Interest-only mortgages
Reverse mortgages
Long-term care insurance
Claiming Social Security early

Promising

Index mutual funds
Exchange-traded index funds
High-yield savings accounts
Certificates of deposit
Treasury bonds
401(k) plans
IRAs
Term life insurance
Rewards credit cards
Conventional mortgages
Home-equity lines of credit
Immediate fixed annuities
Deferred income annuities
Claiming Social Security late

The bottom line: With so many products in the promising category, why risk owning anything else?

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Social Insecurity

I RECENTLY ATTENDED A RETIREMENT READINESS seminar sponsored by the financial firm that holds most of my retirement savings. The first question the presenter asked was, “How many of you think you’ll be able to retire comfortably living off just your Social Security benefits?” I was surprised to see how many people in the audience raised their hands. But maybe I shouldn’t have been surprised: It turns many of these same people couldn’t guess the average monthly Social Security benefit—and most thought it was far higher than it really is.

The Social Security Administration notes that Social Security benefits are generally designed to replace just 40% of the average wage earner’s income after retiring. Yet reports show that Social Security provides a majority of the income for 72% of retirees age 80 or older—and almost all income for 42% of those 80 and up.

Curious to find out your estimated retirement benefit? The Social Security Administration makes it easy: All you have to do is create an online account to access both your earnings history and a statement showing your estimated benefits. It might be prudent to assume the actual benefit received could be up to 25% less than the figure shown: Beginning in 2035, the Social Security Administration reports that the taxes collected will cover just 75% of scheduled Social Security benefits.

The average monthly Social Security benefit for retired workers is around $1,340. Not sure you can retire comfortably on $16,000 a year? Either you need to redefine what “comfortable” means to you—or you should start saving like crazy.

Kristine Hayes is a departmental manager at a small, liberal arts college in Portland, Ore. Her previous blogs include Site Seeing (Part II), Unconventional Wisdom  and My One and Only.

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