Jonathan Clements's Blog, page 462

31 Rules of the Road

SOMETHING HAD TO GO. The final chapter of the Jonathan Clements Money Guide 2015 was devoted to 31 rules for the financial road ahead. For the Money Guide 2016, I'm replacing that chapter with a new final chapter, which details how to create your own financial plan in 18 easy steps.

But even as I axed the 31 rules from the manuscript, I figured they deserved a permanent home. Every year, we see changes in tax thresholds, financial products, market performance, economic numbers and what worries investors. But while the financial world changes constantly, sensible financial advice doesn't--and that, I like to think, is what's captured by the Money Guide 2015's 31 rules of the road.

A Distinction Without Merit

IF WE WORK LIKE DOGS for 40 years, we’ll get our reward, which is the chance to sit around and do nothing for 20 or 30 years. That’s the definition of a successful life, according to conventional financial wisdom. But it doesn’t sound like a whole lot of fun, does it?

My contention: It’s time to rethink the crazy distinction between work and retirement and, in the process, redefine what counts as a successful life. Most of us get a lot of satisfaction from doing work that we’re passionate about and that we think is important, and our goal should be to spend our days engaged in these sorts of activities, whether we’re age 30 or age 70. That brings us to two key questions: How much income will this work generate—and how much income do we need?

Early in our careers, we may not be able to do the work we love, because it doesn’t pay enough to allow us to service our student loans, buy a house and sock away money for retirement. But as we pay down debt and amass some savings, we buy ourselves more and more financial freedom. We might use this freedom to focus on work that may not be as lucrative, but which we might find more fulfilling. Think about the investment banker who becomes a math teacher or the corporate executive who quits to join a nonprofit organization. These folks traded dollar income for psychic income.

As I see it, retirement represents this tradeoff taken one step further. By our 60s, we should have a heap of savings, which means we have a heap of financial freedom—and we might use this freedom to do work we’re passionate about, but which doesn’t pay us any income. That might mean coaching a children’s sports team, volunteering, pursuing artistic endeavors, devoting ourselves to hobbies or getting more involved with our church. Don’t get me wrong: If we can get paid to do what we love, that’s all the better. Indeed, earning even a modest income in retirement can greatly ease the financial strain felt by many retirees.

The bottom line: We need to collapse the distinction between work and retirement—and instead view our financial lives as the pursuit of ever greater financial freedom. That financial freedom, in turn, can allow us to do work we find fulfilling, with less and less worry about the paycheck that comes with it.

September Newsletter

THIS MORNING, I hit send on my inaugural newsletter. What's next for the markets? How can you get your kids started as investors? How can you get a little extra yield without getting whacked by tumbling bond prices? Those are some of the  topics I cover. My next newsletter will go out in early December. If you want to be on the distribution list for that issue, shoot me an email.

Why Retirement Is Different

CHRONOLOGICALLY, RETIREMENT may be our final financial goal, but we should always put it first. Partly, that’s because retirement is so much more expensive than, say, buying a house or putting the kids through college, so it takes many decades of saving and investing to amass enough for a comfortable retirement. But among financial goals, retirement is also unique in two other ways: It isn’t optional—and we can’t pay for it out of current income.

It’s great if we can buy a home and pay our children’s college bills. But neither is something we have to do. By contrast, almost all of us will eventually have to retire. Even if we are fully committed to working until the day we die, eventually we will likely be forced into retirement by our employer, by ill-health or because we simply don’t have the energy anymore to get up and go to work.

Families are regularly exhorted to save for their children’s college education. Some savings are also required to buy a home, because we will need to pay closing costs and we will likely have to make at least a modest down payment. But in the end, whether we are paying college bills or purchasing a house, much of the cost will be paid out of current income.

We take out a mortgage and then effectively buy the house on the 30-year installment purchase plan. Moreover, our monthly mortgage cost often isn’t that much greater than the monthly cost to rent, so there isn’t a huge added out-of-pocket cost when we go from renter to homeowner. Similarly, while families might amass some savings to pay for college, they often cover much of the cost out of current income, whether it’s paying the bills as they arise or borrowing money and then repaying those loans over time. By contrast, we can’t pay for retirement with our regular paycheck—because at that point we won’t have one. Instead, on the day we quit the workforce, we need great gobs of money set aside.

Site Seeing

HOW CAN TRADITIONAL FINANCIAL ADVISORS fend off the threat from low-cost robo-advisors? I tackle that topic in my first regular monthly column for Financial Planning magazine. With the appearance of that column, and the demise of my Wall Street Journal column, I decided to revamp my articles page. That page--which previously just housed my Journal columns--now includes all articles I have written since my return to journalism in April 2014, as well as some articles by others that were devoted to my financial advice.

 

First Look

DAVID GLAUBKE, who created last year's cover for my Money Guide, just sent along the design for next year's edition. The Jonathan Clements Money Guide 2016 will be available on Jan. 1 as both a paperback and e-book, though I plan to put out an early paperback version on Dec. 1, in time for the holidays. The early version will have market and economic data through Nov. 30, while the year-end edition will use Dec. 31 data.

The 2016 edition will be roughly 25% bigger. There are new chapters on how to build your own financial plan and on the basics of investment math, as well as an appendix that describes 134 key financial concepts. I have also revised and expanded existing chapters, including adding sections devoted to some of the great financial debates and to how I handled crucial money issues in my own life.

Twice the Fun

AS THE SOUND OF SUMMER CRICKETS gives way to the din of investors wailing, I've had two relevant articles appear. I helped Bottom Line/Personal put together a piece on "7 lies investors tell themselves." The article was wrapped up weeks ago, but it seems timely in the wake of the recent market turmoil.

Meanwhile, I am now writing occasionally for Financial Planning, a publication geared to financial advisors. Check out the article posted this morning on five strategies for staying calm in the face of market mayhem.

A Mild Case of Indigestion

WHAT SHOULD INVESTORS make of the stock market’s decline? Start with three ideas. First, the S&P 500 has fallen a mere 7.5% from its all-time high, set in May, so the “global market rout” looks more like a mild case of market indigestion.

Second, while the S&P 500 declined 5.8% last week, we can be confident that the underlying, fundamental value of these 500 corporations didn’t deteriorate 5.8%. As usual, investors are trying to figure out the future, and it’s a crude guessing game driven by twitchy investors with short time horizons.

Third, while nobody knows what the stock market’s fundamental value is, it would be hard to argue that U.S. stocks are cheap. U.S. shares might be reasonably valued relative to U.S. bonds, but all that’s telling us is that both will likely generate modest long-run returns from current levels. By contrast, foreign stocks, and especially emerging markets, look like a decent buy if you’re a long-term investor.

So what should investors do? At this juncture, I wouldn’t do much. If you’re regularly contributing to a 401(k) plan or spooning money into an IRA, I would keep it up. If you have less than 30% to 40% of your stock portfolio allocated to foreign stocks, consider directing more of your regular purchases to international markets, and particularly emerging markets.

We aren’t, however, anywhere close to the moment when you should back up the truck and start buying U.S. stocks like crazy. To do that, I would want to see U.S. shares down 25% from their high. Sure, there’s a chance that markets will rally from here. But even if there’s an impressive short-term bounce, today’s buyers of U.S. stocks won’t be looking at great long-run returns, because they’re purchasing at rich valuations.

Binge Writing

THE PUBLISHERS of my 2003 and 2009 books wanted the manuscripts quickly, so I wrote both books in roughly four months. My strategy: Bang out 1,000 words a day for the first 30 days or so, without paying much attention to the quality of the writing. I then spent the next three months checking facts and polishing the manuscript. In both cases, I was working a fulltime job while writing the books, so by the end of the four months I was pretty much wrecked.

Today, I started on another round of binge writing, though this one will be less onerous. The rest of the year looks jammed: I need to update the Jonathan Clements Money Guide for 2016, while teaching a college course on personal finance for the first time, putting out a few newsletters and delivering various freelance articles. I figure I won’t have much time for my other book project, How to Think About Money, which is currently half written. My goal: Get the other half drafted by the end of August. I reckon 1,000 words a day for 14 days should do the trick. I then plan to put the manuscript aside and return to it early in 2016.

The words I spew out over the next 14 days won’t be pretty and a lot rewriting will be required. Still, it’s a strategy I would recommend to other writers. By setting a goal of 1,000 words a day, you overcome the tendency to tinker and procrastinate. You quickly get a chance to view the whole book and see whether it truly hangs together. An added bonus: At the end of the binge writing, you know you have enough material for at least a half-decent book, which gets you past that initial anxiety.

Save Yourself

THE GREAT RECESSION may have been a financial wakeup call for American families. But many have since drifted back to sleep.

The official savings rate averaged 10.6% in the 1950s, 11.1% in the 1960s and 11.8% in the 1970s. From there, it started to slide, averaging 9.3% in the 1980s, 6.7% in the 1990s and just 4.3% in the 2000s. Panicked by the Great Recession, many Americans made a fleeting return to frugality: During the first five calendar years of the current decade, the annual savings rate averaged 5.8%.

But even that hint of hope is fading fast. After hitting a two-decade high of 7.6% in 2012, the savings rate subsided to just 4.8% in both 2013 and 2014, and 2015 is running at a similar pace. Moreover, the official savings rate measures savings as a percentage of after-tax income, while experts typically couch their recommendations in terms of pretax income. The upshot: Most Americans are saving far less than the 10% to 12% of pretax income that’s often recommended.

All this is profoundly frustrating. Many Americans seem to have forgotten the recent financial crisis and appear unperturbed by the prospect of a penniless retirement. Congress has offered a slew of tax incentives to encourage saving and investing, and yet many folks show no interest. Some have suggested that our low savings rate reflects America’s income inequality, with many failing to save because they simply can’t afford to. Others have pinned the blame on the instincts we inherited from our hunter-gatherer ancestors, who were hardwired to consume whenever they could.

Whatever the cause of today’s modest savings rate, this is one time you don’t want to side with the majority. Your neighbors may be headed for a financially strapped retirement. You should strive mightily to avoid it. Saving diligently will never be considered clever or sophisticated. But it’s the one sure path to greater wealth.