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The foresight of market strategists is shaky, but their hindsight is always impressive.

Time Well Spent

I CONSIDER myself a retirement newbie. I only quit fulltime work in May 2018. Still, it doesn’t take long to pick up a few things about life in retirement. Here are four insights I’ve gained over the past year and a half:
1. It’s important to have a plan. I have witnessed how some retirees, without a plan or direction, struggle to fill the empty time. Here in Spain, for some retirees it can become an endless Groundhog Day cycle of daily drinking and tapas hopping.

Read more »

Our Charity

WHEN I WAS in the workforce, it was easy to give to charity. Now that I’m semi-retired, it seems like more of a struggle—for four reasons:

Because I’m no longer employed fulltime, I can’t donate through payroll deduction, which used to make giving simple and automatic.
Leaving fulltime employment often results in reduced or uncertain income, and sometimes both. Today, I find it harder to know how much I can afford to give.
Retirement heightens thoughts of leaving a legacy to children and other heirs.

Read more »

Better Than Timing

IT’S THE GREAT investor fantasy: Quit the stock market at the top and buy back in at the bottom. While the lure of market timing sells millions of books and is standard fodder for financial television, the reality rarely lives up to the promise.
History is littered with the failed dreams of market timers. Less than five years after the nadir of the financial crisis, some pundits were saying U.S. stocks were overvalued. Another five years on and the market had gained more than 60%.

Read more »

Happiness Formula

CLAY COCKRELL has an unusual job. He describes himself as a psychotherapist treating the “1% of the 1%” in New York City. From this vantage point, Cockrell has gained unique insights into the lives of the extremely wealthy. What conclusions does he draw about money and happiness? “If you have an enemy,” Cockrell says, “go buy them a lottery ticket because, on the off-chance that they win, their life is going to be really messed up.”
This observation fits well with the aphorism that “money doesn’t buy happiness.” There’s a growing body of research supporting this view.

Read more »

Guessing Game

WE WON’T KNOW until we get there.
How much do we need for retirement and what will it take to amass that coveted sum? It sometimes seems like the entire financial advice business—brokerage firms, fund companies, financial planners, online calculators and more—is solely focused on this conundrum.
That’s mostly a good thing. It is indeed crucial to amass enough for a comfortable retirement. Still, let’s acknowledge an inconvenient truth: The resulting retirement projections imply a degree of precision that’ll likely look hopelessly naïve once the real world intervenes.

Read more »

Financial Pilates

NOTHING COMPARES to the human body when it comes to the combination of strength, flexibility and control. Build a strong core, and the possibilities are limitless. Through the discipline of Pilates, you can strengthen your core, while developing flexibility and control. It’s a wonderful tool, but one that’s underutilized.
The same can be said for health savings accounts, or HSAs, which can be funded if you have a high-deductible health plan. With an HSA,

Read more »

Money Guide

Claiming Strategies

WHAT'S THE BEST strategy for claiming Social Security benefits if you’re married—and you can’t take advantage of the loopholes closed by the 2015 Budget Act and discussed elsewhere? For most couples, it will make sense for the spouse with higher lifetime earnings to delay claiming benefits until age 70. Let’s be politically incorrect and assume that’s the husband. Delaying until 70 ensures not only the maximum possible monthly benefit for the husband, but also a handsome survivor benefit for his wife, assuming the husband dies first. Because the husband’s benefit could live on after his death, it can make sense for him to delay Social Security, even if he’s in poor health. Problem is, until the husband claims benefits, his wife can’t receive spousal benefits. She can, however, claim benefits based on her own earnings record—and, as we'll discuss below, it may make sense for her to go ahead and claim those benefits. The missed spousal benefits could amount to a tidy sum. For instance, if the husband and wife are the same age and the husband delays benefits until age 70, the wife will miss out on eight years of spousal benefits and, to make matters worse, she won’t receive any credit for delaying spousal benefits beyond her full retirement age of 66 or 67. Still, because the husband’s benefit will be paid until both he and his wife have died—thanks to the survivor benefit—it will typically make sense for him to delay. When shouldn’t the husband delay? There are three factors that could prompt the husband to claim benefits earlier. First, he might claim benefits earlier than age 70 if both he and his wife are in poor health. Second, the husband might claim earlier if he’s much younger than his wife. For instance, if the husband is four years younger than his wife and he delays benefits until age 70, his wife wouldn’t collect spousal benefits until age 74—which means she would miss out on 12 years of benefits. In that scenario, it can still make sense for the husband to delay until age 70, but the case isn’t as strong. Third, the husband might claim earlier if his wife had little or no lifetime earnings. Remember, the wife receives the higher of either her spousal benefit or her own benefit based on her lifetime earnings. If the wife’s own benefit is large, the extra from spousal benefits may not be worth much, if anything, so there’s little cost in the husband delaying to age 70. But if the wife’s own benefit is modest, the spousal benefit will be worth a lot—and the husband might want to claim benefits when his wife reaches age 66 or 67. That will allow his wife to claim spousal benefits at her full retirement age, at which point her spousal benefit will be as large as it will ever get, ignoring any adjustments for inflation. If the higher-earning spouse delays benefits until age 70, when should the lower-earning spouse—the wife in our example—claim benefits based on his or her own earnings record? If the wife claims benefits based on her own earnings record before her full retirement age, that will result in a reduced benefit. That reduction carries over, so that—when the wife is able to claim spousal benefits—she'll receive less than the full 50% of her husband's full retirement age benefit. Still, when the wife claims is a less crucial decision, because the lower-earning spouse’s benefit disappears when the first spouse dies: At that juncture, either the wife would be collecting survivor benefits (assuming the husband had died) or the husband would continue with his benefit as before (assuming the wife had died). If one spouse is in poor health, the lower-earning spouse might claim at 62. If both spouses are in decent health, the lower-earning spouse might claim at his or her full retirement age of 66 or 67. Next: Benefits for Children Previous: Spousal Benefits
Read more »

Archive

Bearing Gifts

AFTER A DECADE of rising stock prices, it’s time to look forward to the next bear market—and the three big benefits it’ll confer. First, a market decline is a great financial gift, but only if you continue to save and invest. While it certainly won’t feel like a gift, a bear market enables you to invest at lower prices, both by adding new savings and reinvesting dividends. Imagine you could choose from among three possible stock market scenarios. In scenario No. 1, the stock market climbs steadily in a straight line for 30 years. In scenario No. 2, you’re hit with periodic bear markets over the three decades. In scenario No. 3, stocks go nowhere for years, before powerfully rallying toward the end of the 30-year period. In all three scenarios, the market averages end up at the same level. The only difference is the path taken to get there. Assuming you’re in the workforce the entire time, and saving and investing consistently, which stock market would you choose to live through? If you picked scenario No. 3, congratulations. That’s the best market scenario if you want the greatest wealth at the end of the 30 years, because it offers the chance to buy stocks at lower prices, on average. What if you chose No. 1? Sorry, that’s the worst one. Meanwhile, No. 2 is somewhere in between. If you behave properly, by not selling and instead continuing to buy stocks, the more bear markets you have during your savings years, the greater the likelihood that you will ultimately retire with a larger nest egg. This may seem counter-intuitive. But remember, over very long time periods—think multiple decades—stock markets should mean revert. In other words, years of underperformance tend to be followed by years of outperformance—and those years of underperformance offer a great chance to buy shares cheaply. Second, we only learn our true risk tolerance by living through bear markets. Fred Schwed wrote the celebrated 1940 book about Wall Street, Where Are the Customers’ Yachts? In it, he offers this memorable passage: “Like all of life’s rich emotional experiences, the full flavor of losing important money cannot be conveyed by literature. You cannot convey to an inexperienced girl what it is truly like to be a wife and mother. There are certain things that cannot be adequately explained to a virgin by words or pictures.” There’s no way to know ahead of time how you will feel and, more important, how you will behave after losing a significant amount of money in the stock market. Asset allocation is the key determinant of your investment returns. Taking on more risk, by allocating more to stocks, should translate into higher returns over the long run. But how much risk can you tolerate without losing sleep and bailing on stocks during a bear market? One of the most important things in investing is to understand yourself, because we are our own worst enemy. Living through a bear market is really the only way to discover the mix of stocks and bonds we’re comfortable living with. In fact, I advocate that young adults start out with an 80% stock-20% bond mix, even though many “experts” would scoff at this and advocate a 100% stock allocation. A 100% stock allocation only maximizes your long-term returns if you don’t panic and go to cash the first time you experience a bear market. Maybe you’ll experience a bear market with an 80-20 portfolio and barely break a sweat, continuing to rebalance as you’re supposed to. In that case, going forward, you might raise your stock allocation to 90% or more. Third, bear markets put the kibosh on bull market foolishness. Not only do higher stock prices make investing riskier, but also the resulting euphoria sucks more people and more money into the market at the worst possible time. Perhaps the one certainty in investing is the cyclical nature of markets and human psychology. This long into a bull market, it’s easy to forget that stock markets can suffer terrible and terrifying short-term losses. One of my favorite quotes is from Sir John Templeton: “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.” Optimism is contagious. You may believe that you think and act independently. But when things are going well in the economy and optimism is rampant, it’s hard to resist the herd mentality. That’s simply how we are wired. Recall the late 1990s dot-com bubble. Near the peak, how many people did you know who weren’t invested in tech stocks? Want a more current example of the increasing flow of money fueled by optimism? Look no further than this year’s IPO market. A bear market will certainly dent your portfolio in the short run. But it might just save you even more in the long run—if it prevents you from falling prey to future market euphoria and the risky behavior that so often ensues. Even if we don’t get caught up in the optimism around us, we aren’t immune to its effects. When market participants engage in increasingly risky behavior, it raises the riskiness of markets for everyone. Never forget the cautionary words of Warren Buffett: “The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.” John Lim is a physician who is working on a finance book geared toward children. His previous blog was Lay Down the Law. Follow John on Twitter @JohnTLim.
Read more »

Numbers

SOME 63% of the civilian population age 16 and older are either employed or looking for work. That’s down from 67% in the late 1990s and early 2000s, but on par with the late 1970s, according to Bureau of Labor Statistics figures.

Home Call to Action

Manifesto

NO. 38: AS STOCK prices fall, our enthusiasm should climb. The decline raises expected returns and offers the chance to buy at lower prices, both with new money and through rebalancing.

Truths

NO. 81: IT PAYS to delay retirement. Postponing gives you more time to save, pay off any debts and collect investment gains. Once you quit the workforce, you’ll be drawing down your nest egg over a shorter expected retirement. You’ll likely also delay claiming Social Security and making any immediate annuity purchase, resulting in larger monthly checks.

Act

ASK WHAT they’ll make. When talking to financial advisors—whether it’s a pushy insurance salesperson or a thoughtful financial planner—think about how they make their money and how much you’ll be charged. The way advisors are compensated can bias their recommendations. Meanwhile, if the cost is too high, your chances of decent returns will be slim.

Think

WINNER’S CURSE. If you’re in a bidding war for a house and come out on top, you may suffer the winner’s curse: In beating out other possibly more prudent and knowledgeable bidders, there’s a risk you overpaid. The winner’s curse can also afflict other buyers, such as corporations that win takeover battles or the highest bidders at an art auction.

Time Well Spent

I CONSIDER myself a retirement newbie. I only quit fulltime work in May 2018. Still, it doesn’t take long to pick up a few things about life in retirement. Here are four insights I’ve gained over the past year and a half:
1. It’s important to have a plan. I have witnessed how some retirees, without a plan or direction, struggle to fill the empty time. Here in Spain, for some retirees it can become an endless Groundhog Day cycle of daily drinking and tapas hopping.

Read more »

Our Charity

WHEN I WAS in the workforce, it was easy to give to charity. Now that I’m semi-retired, it seems like more of a struggle—for four reasons:

Because I’m no longer employed fulltime, I can’t donate through payroll deduction, which used to make giving simple and automatic.
Leaving fulltime employment often results in reduced or uncertain income, and sometimes both. Today, I find it harder to know how much I can afford to give.
Retirement heightens thoughts of leaving a legacy to children and other heirs.

Read more »

Better Than Timing

IT’S THE GREAT investor fantasy: Quit the stock market at the top and buy back in at the bottom. While the lure of market timing sells millions of books and is standard fodder for financial television, the reality rarely lives up to the promise.
History is littered with the failed dreams of market timers. Less than five years after the nadir of the financial crisis, some pundits were saying U.S. stocks were overvalued. Another five years on and the market had gained more than 60%.

Read more »

Happiness Formula

CLAY COCKRELL has an unusual job. He describes himself as a psychotherapist treating the “1% of the 1%” in New York City. From this vantage point, Cockrell has gained unique insights into the lives of the extremely wealthy. What conclusions does he draw about money and happiness? “If you have an enemy,” Cockrell says, “go buy them a lottery ticket because, on the off-chance that they win, their life is going to be really messed up.”
This observation fits well with the aphorism that “money doesn’t buy happiness.” There’s a growing body of research supporting this view.

Read more »

Guessing Game

WE WON’T KNOW until we get there.
How much do we need for retirement and what will it take to amass that coveted sum? It sometimes seems like the entire financial advice business—brokerage firms, fund companies, financial planners, online calculators and more—is solely focused on this conundrum.
That’s mostly a good thing. It is indeed crucial to amass enough for a comfortable retirement. Still, let’s acknowledge an inconvenient truth: The resulting retirement projections imply a degree of precision that’ll likely look hopelessly naïve once the real world intervenes.

Read more »

Financial Pilates

NOTHING COMPARES to the human body when it comes to the combination of strength, flexibility and control. Build a strong core, and the possibilities are limitless. Through the discipline of Pilates, you can strengthen your core, while developing flexibility and control. It’s a wonderful tool, but one that’s underutilized.
The same can be said for health savings accounts, or HSAs, which can be funded if you have a high-deductible health plan. With an HSA,

Read more »

Free Newsletter

Numbers

SOME 63% of the civilian population age 16 and older are either employed or looking for work. That’s down from 67% in the late 1990s and early 2000s, but on par with the late 1970s, according to Bureau of Labor Statistics figures.

Manifesto

NO. 38: AS STOCK prices fall, our enthusiasm should climb. The decline raises expected returns and offers the chance to buy at lower prices, both with new money and through rebalancing.

Home Call to Action

Act

ASK WHAT they’ll make. When talking to financial advisors—whether it’s a pushy insurance salesperson or a thoughtful financial planner—think about how they make their money and how much you’ll be charged. The way advisors are compensated can bias their recommendations. Meanwhile, if the cost is too high, your chances of decent returns will be slim.

Truths

NO. 81: IT PAYS to delay retirement. Postponing gives you more time to save, pay off any debts and collect investment gains. Once you quit the workforce, you’ll be drawing down your nest egg over a shorter expected retirement. You’ll likely also delay claiming Social Security and making any immediate annuity purchase, resulting in larger monthly checks.

Think

WINNER’S CURSE. If you’re in a bidding war for a house and come out on top, you may suffer the winner’s curse: In beating out other possibly more prudent and knowledgeable bidders, there’s a risk you overpaid. The winner’s curse can also afflict other buyers, such as corporations that win takeover battles or the highest bidders at an art auction.

Money Guide

Start Here

Claiming Strategies

WHAT'S THE BEST strategy for claiming Social Security benefits if you’re married—and you can’t take advantage of the loopholes closed by the 2015 Budget Act and discussed elsewhere? For most couples, it will make sense for the spouse with higher lifetime earnings to delay claiming benefits until age 70. Let’s be politically incorrect and assume that’s the husband. Delaying until 70 ensures not only the maximum possible monthly benefit for the husband, but also a handsome survivor benefit for his wife, assuming the husband dies first. Because the husband’s benefit could live on after his death, it can make sense for him to delay Social Security, even if he’s in poor health. Problem is, until the husband claims benefits, his wife can’t receive spousal benefits. She can, however, claim benefits based on her own earnings record—and, as we'll discuss below, it may make sense for her to go ahead and claim those benefits. The missed spousal benefits could amount to a tidy sum. For instance, if the husband and wife are the same age and the husband delays benefits until age 70, the wife will miss out on eight years of spousal benefits and, to make matters worse, she won’t receive any credit for delaying spousal benefits beyond her full retirement age of 66 or 67. Still, because the husband’s benefit will be paid until both he and his wife have died—thanks to the survivor benefit—it will typically make sense for him to delay. When shouldn’t the husband delay? There are three factors that could prompt the husband to claim benefits earlier. First, he might claim benefits earlier than age 70 if both he and his wife are in poor health. Second, the husband might claim earlier if he’s much younger than his wife. For instance, if the husband is four years younger than his wife and he delays benefits until age 70, his wife wouldn’t collect spousal benefits until age 74—which means she would miss out on 12 years of benefits. In that scenario, it can still make sense for the husband to delay until age 70, but the case isn’t as strong. Third, the husband might claim earlier if his wife had little or no lifetime earnings. Remember, the wife receives the higher of either her spousal benefit or her own benefit based on her lifetime earnings. If the wife’s own benefit is large, the extra from spousal benefits may not be worth much, if anything, so there’s little cost in the husband delaying to age 70. But if the wife’s own benefit is modest, the spousal benefit will be worth a lot—and the husband might want to claim benefits when his wife reaches age 66 or 67. That will allow his wife to claim spousal benefits at her full retirement age, at which point her spousal benefit will be as large as it will ever get, ignoring any adjustments for inflation. If the higher-earning spouse delays benefits until age 70, when should the lower-earning spouse—the wife in our example—claim benefits based on his or her own earnings record? If the wife claims benefits based on her own earnings record before her full retirement age, that will result in a reduced benefit. That reduction carries over, so that—when the wife is able to claim spousal benefits—she'll receive less than the full 50% of her husband's full retirement age benefit. Still, when the wife claims is a less crucial decision, because the lower-earning spouse’s benefit disappears when the first spouse dies: At that juncture, either the wife would be collecting survivor benefits (assuming the husband had died) or the husband would continue with his benefit as before (assuming the wife had died). If one spouse is in poor health, the lower-earning spouse might claim at 62. If both spouses are in decent health, the lower-earning spouse might claim at his or her full retirement age of 66 or 67. Next: Benefits for Children Previous: Spousal Benefits
Read more »

Archive

Bearing Gifts

AFTER A DECADE of rising stock prices, it’s time to look forward to the next bear market—and the three big benefits it’ll confer. First, a market decline is a great financial gift, but only if you continue to save and invest. While it certainly won’t feel like a gift, a bear market enables you to invest at lower prices, both by adding new savings and reinvesting dividends. Imagine you could choose from among three possible stock market scenarios. In scenario No. 1, the stock market climbs steadily in a straight line for 30 years. In scenario No. 2, you’re hit with periodic bear markets over the three decades. In scenario No. 3, stocks go nowhere for years, before powerfully rallying toward the end of the 30-year period. In all three scenarios, the market averages end up at the same level. The only difference is the path taken to get there. Assuming you’re in the workforce the entire time, and saving and investing consistently, which stock market would you choose to live through? If you picked scenario No. 3, congratulations. That’s the best market scenario if you want the greatest wealth at the end of the 30 years, because it offers the chance to buy stocks at lower prices, on average. What if you chose No. 1? Sorry, that’s the worst one. Meanwhile, No. 2 is somewhere in between. If you behave properly, by not selling and instead continuing to buy stocks, the more bear markets you have during your savings years, the greater the likelihood that you will ultimately retire with a larger nest egg. This may seem counter-intuitive. But remember, over very long time periods—think multiple decades—stock markets should mean revert. In other words, years of underperformance tend to be followed by years of outperformance—and those years of underperformance offer a great chance to buy shares cheaply. Second, we only learn our true risk tolerance by living through bear markets. Fred Schwed wrote the celebrated 1940 book about Wall Street, Where Are the Customers’ Yachts? In it, he offers this memorable passage: “Like all of life’s rich emotional experiences, the full flavor of losing important money cannot be conveyed by literature. You cannot convey to an inexperienced girl what it is truly like to be a wife and mother. There are certain things that cannot be adequately explained to a virgin by words or pictures.” There’s no way to know ahead of time how you will feel and, more important, how you will behave after losing a significant amount of money in the stock market. Asset allocation is the key determinant of your investment returns. Taking on more risk, by allocating more to stocks, should translate into higher returns over the long run. But how much risk can you tolerate without losing sleep and bailing on stocks during a bear market? One of the most important things in investing is to understand yourself, because we are our own worst enemy. Living through a bear market is really the only way to discover the mix of stocks and bonds we’re comfortable living with. In fact, I advocate that young adults start out with an 80% stock-20% bond mix, even though many “experts” would scoff at this and advocate a 100% stock allocation. A 100% stock allocation only maximizes your long-term returns if you don’t panic and go to cash the first time you experience a bear market. Maybe you’ll experience a bear market with an 80-20 portfolio and barely break a sweat, continuing to rebalance as you’re supposed to. In that case, going forward, you might raise your stock allocation to 90% or more. Third, bear markets put the kibosh on bull market foolishness. Not only do higher stock prices make investing riskier, but also the resulting euphoria sucks more people and more money into the market at the worst possible time. Perhaps the one certainty in investing is the cyclical nature of markets and human psychology. This long into a bull market, it’s easy to forget that stock markets can suffer terrible and terrifying short-term losses. One of my favorite quotes is from Sir John Templeton: “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.” Optimism is contagious. You may believe that you think and act independently. But when things are going well in the economy and optimism is rampant, it’s hard to resist the herd mentality. That’s simply how we are wired. Recall the late 1990s dot-com bubble. Near the peak, how many people did you know who weren’t invested in tech stocks? Want a more current example of the increasing flow of money fueled by optimism? Look no further than this year’s IPO market. A bear market will certainly dent your portfolio in the short run. But it might just save you even more in the long run—if it prevents you from falling prey to future market euphoria and the risky behavior that so often ensues. Even if we don’t get caught up in the optimism around us, we aren’t immune to its effects. When market participants engage in increasingly risky behavior, it raises the riskiness of markets for everyone. Never forget the cautionary words of Warren Buffett: “The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.” John Lim is a physician who is working on a finance book geared toward children. His previous blog was Lay Down the Law. Follow John on Twitter @JohnTLim.
Read more »