Jonathan Clements's Blog, page 424

Top 10 Blogs: Fourth Quarter

AS WE LOOK FORWARD to the year ahead, here’s a chance to look back. Below are HumbleDollar’s 10 most popular blogs from the past three months:

Number One Number
We Know Jack
Ten Financial Principles
All the Right Reasons
Worse Than Marxism?
Three Keys to Happiness
Giving: 10 Questions to Ask
Money Well-Wasted
Life After Amazon
Courtside Seat (Part II)

The above list includes four blogs written by other contributors, which I’m thrilled about. I’ve always wanted HumbleDollar to be about more than just me. Over the past year, the site has attracted some wonderfully thoughtful writers, who have offered up engaging pieces that often discuss their own finances. Interested in joining them? Check out the site’s blogging guidelines.

Follow Jonathan on Twitter @ClementsMoney and on Facebook.

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Best Investment 2018

THE ABOVE HEADLINE OVERPROMISES, I readily admit. Still, three considerations—taxes, risk and the economic cycle—point to one conclusion: Paying down debt in 2018 looks like an awfully smart move.

Debtors’ prison. Ridding yourself of debt, even mortgage debt, has long been a savvy alternative to buying bonds and certificates of deposit. But thanks to the new tax law, it looks especially savvy right now—and especially if you’re married.

How come? The new tax law took away personal exemptions but compensated by roughly doubling the size of the standard deduction. In 2018, the standard deduction will be $24,000 for married couples filing jointly, $18,000 for heads of household and $12,000 for single individuals. Meanwhile, the allowable itemized deduction for state and local taxes, including property taxes, will be capped at $10,000 starting next year.

That means that many married couples will end up taking the standard deduction, because their local tax deduction, mortgage interest and other allowable deductions don’t exceed their $24,000 standard deduction and thus it isn’t worth itemizing. Even if their itemized deductions exceed the $24,000 threshold, the benefits of itemizing will likely prove modest.

To understand why, imagine you have $27,000 in itemized deductions, including $17,000 in interest from your 4% mortgage. It might seem like paying all that mortgage interest is sharply reducing your tax bill and hence your after-tax interest cost might be closer to 3%, assuming you’re in the new 22% or 24% marginal tax bracket.

But remember, in this example, your $27,000 of itemized deductions are barely above your $24,000 standard deduction. Result: Your itemized deductions, including that $17,000 in mortgage interest, are reducing your taxable income by a modest $3,000. Paying off the mortgage—and getting rid of that 4% annual interest cost—looks smarter than ever.

In the past, many brokers and financial advisors have discouraged clients from paying down debt. That way, the advisor ends up with more money to manage and, of course, can charge fees or commissions for doing so. But from now on, you should be leery of advisors who insist that carrying a big mortgage is the best strategy, unless they offer a detailed justification based on your individual tax situation.

Risk unrewarded. We’re in the ninth year of a bull market for U.S. stocks—and in the fourth decade of a bull market for bonds. Financial markets are, alas, mighty expensive and priced for modest returns.

In the years ahead, the gain from buying bonds will most likely be less than the interest cost you could avoid by paying down debt. It’s hard to be so definitive about stocks, because changes in investor sentiment are such a big driver of annual stock returns. Still, over the next 10 years, you probably won’t earn more than 5% or 6% a year from U.S. stocks, barely more than the 4% interest you might avoid by paying off a mortgage.

Moreover, that 5% or 6% comes with a heap of short-term risk. While foreign stocks still appear reasonably priced, U.S. shares are richly valued based on price-earnings multiples, the Shiller P/E, Tobin’s Q and dividend yields. Are you prepared for a 30% or 40% short-term decline in share prices? Faced with that risk, I suspect many folks wouldn’t mind notching a guaranteed 4% by paying down their fixed-rate mortgage.

That said, before paying down debt, I would still stash enough in a 401(k) plan to earn the full employer match, and also contribute to a tax-deductible or Roth IRA, even though that’ll mean buying pricey stocks and bonds. But if you’ve made the most of those opportunities and you have additional dollars to save, ridding yourself of debt looks pretty darn attractive.

Slowdown ahead. Here we get to pure speculation. The economic expansion is in its ninth year. The new tax law will stimulate the economy, but it isn’t clear how much further unemployment can fall. Inflation ahead? To head off that risk, will the Federal Reserve start hiking short-term interest rates even faster?

With any luck, the economy will cruise along in Goldilocks mode, neither too hot nor too cold. But what if it doesn’t? This might be a good moment to prep your finance for the next economic downturn—and that means not only building up your emergency fund, but also paying down debt.

While you’re at it, if you are a homeowner, consider setting up a home equity line of credit. That way, if you pay down your mortgage but later find yourself out of work and in need of cash, you could “re-borrow” the money by tapping into your home’s value. Sound like a smart strategy? It isn’t as smart as it used to be: The interest you pay on your home equity line of credit won’t be tax-deductible, thanks to another change introduced by 2017’s tax law.

Follow Jonathan on Twitter @ClementsMoney and on Facebook.

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Top 10 Blogs: 2017

WE’RE READY TO DON our birthday hats here at HumbleDollar, as we close out our first year. What caught your attention over the past 12 months? Here are the 10 most popular blogs from 2017:

Retirement: 10 Questions to Ask
Fooled You
Ten Commandments
Courtside Seat
Next to Nothing
The Good, the Bad and the Ugly
Measure for Measure
Nothing Better
Number One Number
We Know Jack

Meanwhile, the year’s most popular newsletters—based on online views—were October’s Enough Already and December’s Timely Tale. What about our online money guide? The chapter devoted to various lists was the most visited section, followed by those on retirement, investing, the big picture and houses.

Follow Jonathan on Twitter @ClementsMoney and on Facebook.

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Aiming High

BACK IN 2013, I was recently divorced, living on my own for the first time and utterly naïve about investing. I was in my late 40s, I’d lost half of my small state pension in the divorce and I was afraid I’d be working well into my 70s if I didn’t get my financial life on track.

I set the ambitious goal of having a net worth of $500,000 by 2022, when I’ll turn 55. Now, every December, I sit down and assess my progress toward that goal.

Employer-funded retirement account: Up. Back in 2013, all the money I had in my primary retirement account was invested very conservatively. I learned I wasn’t atypical. Women tend to have a much lower tolerance for risk than men. By 2014, I felt sufficiently confident in my investing knowledge to move a large portion of the account into more aggressive mutual funds. That decision paid off handsomely in 2017. The value of my employer-funded account, into which my employer currently contributes $567 per month, jumped more than $37,000 over the past 12 months.

Income: Up. After almost 20 years in my job, my salary is still far from six figures. I did, however, receive a 3.5% raise this year, bringing my gross annual salary to just over $68,000. In addition, various freelance writing gigs added $3,000 to my income.

403(b) contributions: Up. In 2017, I contributed $17,400—roughly 26% of my salary—to my 403(b) plan. Though I’m still not close to meeting my maximum allowable contribution of $24,000, I’m pleased I was able to invest more than I did in 2016, when I channeled $16,200 into the account.

Roth IRA earnings: Up. Until recently, my Roth IRA was invested in a fairly aggressive growth fund. I’ve never had the money earmarked for any particular use, so I just let it be. In October, I moved it to a less risky fund, since I decided I might use the money for a house down payment in a few years. My Roth account grew by just over $5,000 in the last year.

Roth IRA contributions: Down. Having seen a decade ago how the Great Recession depleted my retirement account, I know how quickly and dramatically the stock market can drop. Seeking a way to balance my fear of losing money with the confidence to invest more aggressively, I came up with a solution: I decided to take an opportunistic view of stock market declines, seeing them as a temporary “sale.”

During 2016’s brief Brexit downturn, I stashed $4,000 in my Roth and then happily watched my investment begin to grow just days later. This year offered far fewer periods of stock market downtime, so I’ve only invested $3,500 in my Roth so far.

Rent: Up. My rent increased $50 per month in 2017. After years of large rate increases, the rental market in Portland seems to be leveling out. Vacancy rates are beginning to rise, so I’m hopeful future rent increases will eat up less of my income.

Taxes: Stable. Stashing a large percentage of my pretax income in retirement accounts allows me to keep my taxes at a reasonable level. My effective tax rate for 2017 should be the same, or close to, the 11% rate I paid in 2016.

Net worth: Up. Since I’m no longer a homeowner, my net worth is made up entirely of the cash, investments and retirement accounts I hold. Heading into 2018, my current net worth sits at approximately $389,000. That figure puts me in the 81st percentile for net worth in my age group—and far closer to $500,000 than I thought possible when I set that goal just four years ago.

Kristine Hayes is a departmental manager at a small, liberal arts college in Portland, Oregon. Her previous blogs include Hidden Gems, Keeping It Private and A Rewarding Experience .

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First Things First

IN A CLASSIC EPISODE of the sitcom 30 Rock, Tina Fey’s character, Liz Lemon, muses about the size of her nest egg: “I have money saved. Two years. Maybe four, if I cancel cable.”

Not worried about the size of your cable bill? In all likelihood, you’re fretting about one aspect of your financial life—and probably more than one. You might be wrestling with housing costs, student loans, the cost of putting your own children through school, funding retirement accounts, what steps to take in response to the new tax law, or concerns about a stock market that seems to go higher every day. In fact, in working recently with one family, we identified no fewer than eight distinct financial priorities that they wanted to balance.

Meanwhile, the constant din of financial news can make it hard to focus. On a recent morning, these were some of the headlines:

“How the Fed Rate Hike Will Affect Your Finances”
“Market Convinced Trump Bump 2.0 Is Set for 2018”
“A Leading Indicator for Stocks Just Entered a Death Cross”

In the face of such uncertainty, it can be difficult to know where to start or what to prioritize. Here are three suggestions:

1. Set one overriding goal. This was probably the approach you took in school: If you had a big project or exam in front of you, you put your head down and focused on that one goal until you got it behind you. You didn’t completely neglect everything else; you simply prioritized other goals lower on your list until you got done that one thing that needed to get done first.

In your financial life, try the same approach. If you’re early in your career, maybe your goal is to pay off your student loans or save for a house. If you’re further along, maybe your goal is to transfer assets to the next generation tax-efficiently. Wherever you are, I believe it’s a powerful strategy to focus your financial resources on one primary goal at a time. For now, don’t worry about your second or third or eighth goal. I’m convinced that, by being single-minded in tackling financial priorities, you will actually end up accomplishing more overall than if you tried to tackle everything at once.

2. Write down your “big four.” By that, I mean your income, expenses, assets and liabilities. I always stress the importance of trying to get them all on one piece of paper.

There are two reasons for this. First, it helps ensure that nothing is falling through the cracks. Second, this may help you see solutions that would have eluded you if your financial information was scattered across a dozen different individual statements in your filing cabinet. Think about it like putting together a puzzle: You certainly wouldn’t try to assemble a puzzle without all the pieces on the table in front of you. It’s the same with your finances.

One example: A middle-aged couple I worked with were able to save thousands on life insurance premiums after realizing they had long since amassed enough money to self-insure.

3. Don’t let the best be the enemy of the better. It’s natural to feel overwhelmed by all the unknowns in your financial future. Where will my job take me? How will my industry change in the future and what will that mean for me? Will Congress change the tax code again? Will the estate tax go away permanently? Unfortunately, none of us has a crystal ball.

This might seem discouraging. “If I don’t know what’s going to happen,” you might worry, “I’m bound to make mistakes.” But here’s another way to look at it: Since there are no “right” answers out there, you can relax a little, knowing you are doing your best with the information you have. What’s most important is to avoid doing nothing. Take comfort in the fact that your financial plan does not need to be perfect. It’s far better to have a plan that might prove temporary than to have no plan at all.

Adam M. Grossman’s previous blogs include Grossman’s Eleven and Ten Financial Principles . 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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This Week/Dec. 24-30

AIM TO BE DEBT-FREE BY RETIREMENT. If you aren’t, you’ll have an added living cost to cover. That could necessitate larger IRA withdrawals or selling winning stocks in your taxable account. This extra income could, in turn, trigger taxes on your Social Security benefit and larger Medicare premiums. To avoid those pitfalls, pay off all debt before you quit the workforce.

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Changing Seats

WHAT MATTERS IS WHAT we focus on. Forget the bad that has happened. Don’t dwell on the goals that remain elusive. Instead, if we’re striving for greater happiness, we should ponder the good in our lives.

This is a great moment to do just that: Most of us are surrounded by friends and family, we have time away from work—and the abundance offered by U.S. society is, in many households, epitomized by a flabbergasting pile of presents.

As I’ve often noted, money buys limited happiness, thanks to so-called hedonic adaptation. We’re sure that the new car and the bigger house will make us endlessly happy. But instead, we quickly get used to these material improvements and may even come to regret them, as the car breaks down and the house demands constant care. Undeterred, we hang our hopes on some future material improvement, confident that we’ve finally found the ticket to greater happiness. It’s an unrelenting cycle of hope and dissatisfaction that keeps us charging forward—and charging hefty sums to our credit cards—and yet we never seem to make any progress.

Is there a way to counter adaptation and thereby squeeze more happiness out of the dollars we spend? One strategy recommended by experts: Pause occasionally and ponder the good things in our lives. Admire the car and house. Think about the recent promotion and pay raise. Recall last summer’s vacation. Appreciate the friends and family gathered around the dining room table. This act of focusing can help us recall happy times and remind us how lucky we are.

To be sure, it takes mental effort to step back from the maelstrom of everyday life and ponder our good fortune. One trick that makes it easier: Move things around. Rearrange the furniture. Swap the pictures on the walls. Move the vacation snapshots from one room to another. Suddenly, you’ll find yourself looking with fresh eyes at paintings you had stopped noticing, admiring the antique end table you had almost forgotten about, and reminiscing about last year’s family reunion.

Similarly, at dinners this holiday season, sit in a different chair. That’ll allow you to see your house from a different angle—as well as looking anew at the loved ones gathered around the table. My fondest hope: You’ll feel a renewed appreciation for all you have and for all the wonderful people in your life.

Follow Jonathan on Twitter @ClementsMoney and on Facebook.

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Betting on Me

I BLEW OUT MY KNEE when I was 14. Doctors told me to concentrate on academics, as my days playing sports were over. I had no control over my injury, but I could control my response. I decided to focus on academics—and also return to the sport I loved.

My new goal: Play soccer the following fall and make varsity as a sophomore. With my parent’s guidance and support, we found a world-renowned orthopedic surgeon close to my hometown.

This shift in attitude heralded a newfound drive and desire to bet on myself—an attitude that carried over into my adult years. I knew other situations would arise over which I had no control. It made sense to arm myself with an advanced education, so I had the best chance of success. My father’s rise from extreme poverty to a PhD provided a front row seat to observe the power that education has to transform lives.

Pursuing an MBA didn’t come without risks. There was the related education debt, two years of lost income and no retirement contributions, and a substantial investment of time and energy. There was also no guarantee that a cushy, high-paying job waited on the other side.

I hedged these risks by attending a business school with a positive overall return on investment. This calculation weighs the projected compensation five years after graduation against the cost of attending the program and the wages that are foregone. With only about 70 schools offering a positive ROI, it was a key consideration. Other factors included small class sizes, location, international exposure and related experiential learning.

Also don’t underestimate the lifelong relationships and camaraderie. I learned more from my MBA cohort and favorite professor than any financial calculation could ever account for. The quality of people added to my life, thanks to business school, will never be lost on me.

To make the most of my investment and education, I was often the first to arrive and the last to leave. You name it, I was there: Professor office hours. Guest speakers. Too many group projects to count. Networking opportunities. Education is often what you make of it.

In the midst of the financial crisis, I graduated with honors and secured an incredible job with a Fortune 50 company.

The dedication and hard work of business school was not unlike the long, slow process of physical therapy and recovery from my knee injury. There were times I wanted to quit and moments when I questioned my drive. Still, I kept showing up, not for glory or prestige, but for myself. My advanced education doesn’t guarantee anything. It may be the most expensive experience to date, but it’s morphed into the biggest asset I have.

For those keeping score, I did make the varsity soccer team as a sophomore.

Anika Hedstrom’s previous blogs include Along Came Sheila, Gold Dust and Growing Up (Part IV) . Anika is a financial planner with  Vista Capital Partners  in Portland, Ore. Follow her on Twitter @AnikaHedstrom .

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Course Correction

OUR DECEMBER FINANCIAL TRADITION is for my wife and four daughters to frolic in the holiday shopping minefield, while I decry their irresponsible behavior and try to establish some semblance of financial stewardship. In response, I receive heavy sighs, eye-rolling, and other displays of deep and abiding affection.

Maybe not coincidentally, December is also when we do our financial planning for the year ahead. There is no shortage of such discussions on the web. This year, I’m piling on with my own. It isn’t because my plans are brilliant, or even rise to mediocre, but because the readers of this blog are known to respond with very clever ideas for improvement. Social accountability, you know. Here are some of the financial changes we’re planning for 2018:

Automation. We continue to put more of our financial transfers on autopilot. This had made our financial lives immeasurably simpler. Not everything is automated, but we’re getting close. I no longer fret over expenses that come around just once a year.

An added bonus: With separate accumulation accounts for taxes, insurance, education, charity, retirement, recreation and emergency savings, it’s very simple to look at a dashboard of our financial accounts, and see how things are going and make minor corrections as needed.

Fixed living costs. We’re looking for ways to reduce recurring monthly expenses—what HumbleDollar has dubbed the “number one number.” Donna and I do pretty well here, but there is always room for improvement and compromise. I’m all for eliminating cable and heaving the television into a dumpster, but others have different views, so we’ve scheduled time to review and share our priorities for the coming year.

Health insurance. I’m already regretting that I didn’t change my health insurance to the high-deductible plan offered by my employer. That way, I could have taken advantage of the unique and powerful savings opportunity offered by the attendant health savings account.

The change would have complicated coverage for our two adult kids who are still covered by my employer. Although they would have coverage under the plan, at least one of them would not be eligible for the funds in our health savings account. I’m okay with letting them budget for their own deductibles, but their (overly protective) Mom felt otherwise. Happy wife, happy life. I’ll nudge my 401(k) contributions upward as consolation, and advocate for the change in health coverage again next year.

Life insurance. We decided to load up on the relatively inexpensive life insurance available through my employer. This decision carries some risk in terms of coverage if I am suddenly unemployed—and in terms of my family learning the cash value of my untimely death.

Disability insurance. For the first time, we elected to drop the supplemental long-term disability coverage offered through my employer. The cost has crept up over the years and adds only about 10% to payouts in the event of a claim. As we cross some age-related thresholds, we will have penalty-free access to some retirement funds in 2018 and beyond, so it seemed reasonable to self-insure for the difference. Only time will tell.

Recreation. In recent years, we have enjoyed some great recreational experiences as a family, which I will continue to encourage. Multisport races, cycling, climbing, whitewater paddling, competitive shooting, regional travel and family celebrations have benefits that are hard to quantify, but are priceless to me as a husband, father and father-in-law. Yes, there can be large expenses associated. But these activities provide opportunities to exercise discipline, challenge and encourage each other to improve, and prepare for the next sporting event.

Retirement. Over the past few years, my monumental ignorance has been slowly displaced by awe for the complexity of retirement planning. In our situation, there are many moving parts, all highly interconnected. The resources available through very bright contributors to this blog and others are inexorably lifting the dense fog surrounding these matters for me.

In 2018, our 401(k) contributions, along with the employer match, will continue to add to our tax-deferred savings, and we could even hit the annual cap. Meanwhile, I’ll max out my Roth IRA at Vanguard again in the year ahead, which will give me tax-free withdrawals in retirement to balance the taxable withdrawals from my 401(k).

Investments. What will we do in response to the current stratospheric valuations in the stock market? Absolutely nothing. We’re indexers, and I’m smart enough to know that I’m not smart enough to beat a broad index.

Real estate. We’ve been saving for a long time with an eye toward buying a residential rental property. We’ll get more aggressive with that in 2018, and may even pull the trigger on a purchase. This will no doubt be the subject of much future scribbling.

Of course, any outcomes relative to these efforts are subject to influences well beyond our control. None of us has any idea what the coming weeks and months will bring, and our government seems profoundly adroit at crisis generation. But one thing is certain: The Law of Entropy applies to personal finance. Without regular infusions of energy and attention, everything is certain to devolve into chaos.

When not paddling, biking or shooting, Phil Dawson provides technical services for a global auto manufacturer. He, his sweetheart Donna and their four extraordinary daughters live in and around Jarrettsville, Maryland. His previous blogs were A Thanksgiving Prayer and Life After Amazon . You can contact Phil via LinkedIn.

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This Week/Dec. 17-23

GIVE AWAY APPRECIATED ASSETS. By donating stocks with unrealized capital gains, you can help a charity, avoid capital gains taxes and get an immediate tax deduction. Looking for more retirement income? Use appreciated assets to buy a charitable gift annuity. Over age 70½? You could save on taxes by donating part of your IRA’s required minimum distribution.

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