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Saving is gratification delayed. Borrowing is pain postponed.

It’ll Cost You

IT’S IRONIC that we often shortchange retirement savings during the first half of our working lives, because that’s when we can buy future retirement dollars at a huge discount—thanks to investment compounding.
How can we hammer home this point? My proposal: We should adopt a simple mental math rule that allows us to weigh today’s spending against future retirement dollars. That brings me to my ”6 to 2 times 200” rule. The rule covers five age groups: early 20s,

Read more »

Solo Effort

SHORTLY AFTER I retired in March 2017, I was asked to consult on some projects. I knew it was going to be a more complex tax year than I’d faced before. I had earned income from my previous employer, pension income and self-employment income from my consulting.
On top of all that, my wife started a new fulltime job the Monday after I retired. We switched to her benefits, but her company didn’t have a high-deductible health plan with an HSA,

Read more »

Yet Another Reason

I FEEL LIKE a broken record when I talk about the benefits of index funds. Indeed, index fund advocates—myself included—sometimes get a little preachy, so I won’t bore you with the same facts I’ve cited before.
Instead, I want to focus on a more subtle reason to index, which has been highlighted by the stock market’s behavior over the past year. You’ve probably heard the expression “a rising tide lifts all boats.” When it comes to the stock market,

Read more »

Improving the Odds

WE HEAR ABOUT highflying stocks and hotshot money managers, and it’s easy to imagine the streets of lower Manhattan are paved with gold. But the truth is a tad more mundane.
Want some reasonable assurance of investment success? We should shun the excitement of trying to pick winners and instead focus on more prosaic portfolio tweaks. The overriding goal: ensure the compounding of our investment dollars encounters as little friction as possible.
Minimizing this friction will,

Read more »

Mild Salsa

BALANCED FUNDS are a great first investment for those with a moderate risk tolerance. But which fund? Vanguard Balanced Index Fund Admiral Shares, with its incredibly low 0.07% expense ratio, $3,000 investment minimum and mix of 60% stocks and 40% bonds, is the standard by which all balanced funds should be judged—and it’s likely your best choice.
But if it isn’t one of your 401(k) options, chances are you’ll find the plan includes one or more of the other five funds in the accompanying chart.

Read more »

What Do You Mean?

WORDS AND PHRASES have a powerful impact. They motivate and mislead. They’re subject to perceptions and preconceived notions. They come and go in fashion. Whatever happened to the word “gobbledygook”? Okay, I admit it, I’m also a fan of “curmudgeon.”
Today, there are several words and phrases in fashion that pack an emotional punch, but sometimes they’re misunderstood or go unquestioned. When you hear the following 10 words and phrases, I’d advise you to put them under a magnifying glass:
1.

Read more »

Money Guide

Buying a Home

THINKING OF BUYING a home? Before you start bidding on properties, ask yourself six questions: How long will I stay put? If you think you’ll move within five years, perhaps because of your job or because the house you can currently afford won’t really be big enough, buying may not be smart. It would likely be better to wait until you can purchase a place you’ll be happy with for the long haul. How much can I borrow? A mortgage lender may be willing to let you take on total monthly mortgage payments, including principal, interest, homeowner’s insurance and property taxes, equal to 28% or so of your pretax monthly income. We have more on mortgages in the chapter on borrowing. How much can I put down? Ideally, you should save enough to put down 20% of the purchase price, so you avoid taking out private mortgage insurance, or PMI. Even if you can’t scrape together 20%, the more you put down, the less you may have to pay in PMI. Coming up short? You might be eligible to make a $10,000 penalty-free withdrawal from your individual retirement account and, if married, your spouse could do the same. The $10,000 is a lifetime limit, and the provision can be used only by those who haven’t owned a house within the past two years. The down payment isn’t the only cost you will incur. Mortgage application fees, legal costs, a home inspection and title insurance could easily amount to $3,000 to $6,000, and maybe more. Where should I buy? In tackling that question, give particular thought to two issues. First, are the schools good? If not, you might find yourself paying for private schools, which is an expensive proposition. Even if you don’t have children, good schools can bolster property prices—though it also means it costs more to buy into the neighborhood and property taxes are likely higher. Second, how long will your commute be? Research suggests that a long commute is one of the biggest causes of unhappiness. What other costs will I face? Beyond the down payment and closing costs, give some thought to other expenses you might incur. What are the property taxes? Will you need to spend substantial sums on remodeling, either immediately or within the first few years? Should I use a real estate agent? While sellers typically use a real estate agent, there’s less need if you are buying—and it could put you in a weaker bargaining position. Yes, by retaining a real estate agent, you may hear about properties before they hit the public listings. But if you’re negotiating with a seller, you may also find there’s less wiggle room if you use a realtor. If a seller’s agent is looking at earning the entire commission, he or she might shave the commission to bridge the difference between what a buyer is offering and what a seller will accept. But if the seller’s agent will have to split the commission with a buyer’s broker, the agent may be less willing to cut the commission. Next: Selling a Home Previous: Jonathan's Story: Homes Blogs: Heading Home (I), (II), (III), (IV), (V)The $121,500 Guestroom, Home Economics and Five Steps to Your Own Front Door
Read more »

Archive

Under Construction

TO MY WAY of thinking, it is inexcusable that we’ve reached the point where there's even the possibility that Social Security may not be able to pay full benefits 16 years from now. Americans are scared by the prospect. Some have even given up hope that the program will continue to exist. Back in 2000, Social Security's Trustees urged action: “In view of the size of the financial shortfall in the [Old-Age, Survivors and Disability Insurance] program over the next 75 years, we again urge that the long-range deficits of both the [Old-Age and Survivors Insurance] and [Disability Insurance] Trust Funds be addressed in a timely way. It is important to address both the OASI and DI problems well before any necessary changes take effect, to allow time for phasing in such changes and for workers to adjust their retirement plans to take account of those changes.” Similar warnings, urging action sooner rather than later, are contained in every Trustees report since 2000. And yet nothing significant has been done to solve the problem. To apply another band-aid, Congress in 2017 authorized the temporary reallocation of the payroll tax from the old-age fund to the disability fund for years 2016 through 2018. That was because the disability fund was running out of money sooner than the old-age trust. It isn’t hard to craft a balanced combination of changes that will fix the problem. I cooked up my own solution using the calculator on the Committee for a Responsible Federal Budget website. These changes would make Social Security solvent for the next 75 years. You may have better ideas. But the point is, a combination of changes will easily fix Social Security and increase benefits. My proposed fix:
  • Increase initial benefits by 5%.
  • Raise the normal retirement age by one year to 68.
  • Change the index for cost-of-living adjustments to CPI-E, which more closely reflects retiree costs.
  • Increase the payroll tax by 2.5 percentage points, with half coming from each worker and half from their employers. It could be less for workers, but only if the payroll tax increase was greater on employers.
  • Apply the payroll tax to 90% of wages, while also increasing benefits for those who end up paying more in payroll tax. This still generates additional net revenue, because today’s Social Security benefit formula favors lower paid workers (or, to put it another way, higher earners effectively receive a lower return on the payroll tax they pay).
  • Cover newly hired non-federal government employees who currently do not contribute to Social Security. This should allow states to adjust their public pensions and lower long-term liabilities.
  • Apply the Social Security payroll tax to the cafeteria plans offered by many employers. When employees pay for health benefits offered through their employer, they pay with dollars that are not only income-tax-free, but also escape the payroll tax.
  • Diversify a portion of the Social Security Trust funds away from Treasury bonds and into other investments, including stocks, with a view to earning higher returns. Given the long-term nature of Social Security’s financial obligations, such a move would involve minimal risk.
With the above plan, no current retirees are harmed, while the impact on current workers is modest. Nobody likes higher taxes of any kind. But let’s face it: Social Security is part of our social and economic fabric. Americans will continue to rely on Social Security for a significant portion of their retirement income—and we need to agree on a fix. Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous blogs include Get Me the DoctorRunning in Place and Tortoises Needed. Follow Dick on Twitter @QuinnsComments.
Read more »

Numbers

AMONG RECENT graduates, 21% wish they’d chosen a less expensive college and just 14% feel their education was worth more than the money they spent, found a survey for Fidelity Investments.

Home Call to Action

Manifesto

NO. 60: WE SHOULDN’T necessarily be investment contrarians, but we should be leery of crowds. When “everybody” is buying, that’s a warning sign—and we should resist joining the stampede.

Truths

NO. 29: BROKERAGE commissions aren’t your only trading cost. When you buy and sell individual stocks and bonds, or a fund manager does so on your behalf, you lose money to the bid-ask spread—the gap between the lower price at which you can currently sell and the higher price at which you can buy. Wall Street’s market makers pocket the difference.

Act

WHEN MAKING a purchase, ponder not just its virtues, but also the maintenance, repairs and other hassles involved—because those’ll eventually loom large. Take the country home. It may initially seem like a great escape. But soon enough, you’ll be just as focused on the drive back and forth, and on the chores you’ll have to do once you’re there.

Think

WEIGHTING RETURNS. Typically, we see time-weighted returns, which reflect our gain over, say, 10 years, assuming we bought at the start of the period and never made any further trades. A dollar-weighted return, by contrast, factors in when we bought and sold. If the market dipped during the 10 years and we invested more, that would boost our dollar-weighted return.

It’ll Cost You

IT’S IRONIC that we often shortchange retirement savings during the first half of our working lives, because that’s when we can buy future retirement dollars at a huge discount—thanks to investment compounding.
How can we hammer home this point? My proposal: We should adopt a simple mental math rule that allows us to weigh today’s spending against future retirement dollars. That brings me to my ”6 to 2 times 200” rule. The rule covers five age groups: early 20s,

Read more »

Solo Effort

SHORTLY AFTER I retired in March 2017, I was asked to consult on some projects. I knew it was going to be a more complex tax year than I’d faced before. I had earned income from my previous employer, pension income and self-employment income from my consulting.
On top of all that, my wife started a new fulltime job the Monday after I retired. We switched to her benefits, but her company didn’t have a high-deductible health plan with an HSA,

Read more »

Yet Another Reason

I FEEL LIKE a broken record when I talk about the benefits of index funds. Indeed, index fund advocates—myself included—sometimes get a little preachy, so I won’t bore you with the same facts I’ve cited before.
Instead, I want to focus on a more subtle reason to index, which has been highlighted by the stock market’s behavior over the past year. You’ve probably heard the expression “a rising tide lifts all boats.” When it comes to the stock market,

Read more »

Improving the Odds

WE HEAR ABOUT highflying stocks and hotshot money managers, and it’s easy to imagine the streets of lower Manhattan are paved with gold. But the truth is a tad more mundane.
Want some reasonable assurance of investment success? We should shun the excitement of trying to pick winners and instead focus on more prosaic portfolio tweaks. The overriding goal: ensure the compounding of our investment dollars encounters as little friction as possible.
Minimizing this friction will,

Read more »

Mild Salsa

BALANCED FUNDS are a great first investment for those with a moderate risk tolerance. But which fund? Vanguard Balanced Index Fund Admiral Shares, with its incredibly low 0.07% expense ratio, $3,000 investment minimum and mix of 60% stocks and 40% bonds, is the standard by which all balanced funds should be judged—and it’s likely your best choice.
But if it isn’t one of your 401(k) options, chances are you’ll find the plan includes one or more of the other five funds in the accompanying chart.

Read more »

What Do You Mean?

WORDS AND PHRASES have a powerful impact. They motivate and mislead. They’re subject to perceptions and preconceived notions. They come and go in fashion. Whatever happened to the word “gobbledygook”? Okay, I admit it, I’m also a fan of “curmudgeon.”
Today, there are several words and phrases in fashion that pack an emotional punch, but sometimes they’re misunderstood or go unquestioned. When you hear the following 10 words and phrases, I’d advise you to put them under a magnifying glass:
1.

Read more »

Free Newsletter

Numbers

AMONG RECENT graduates, 21% wish they’d chosen a less expensive college and just 14% feel their education was worth more than the money they spent, found a survey for Fidelity Investments.

Manifesto

NO. 60: WE SHOULDN’T necessarily be investment contrarians, but we should be leery of crowds. When “everybody” is buying, that’s a warning sign—and we should resist joining the stampede.

Home Call to Action

Act

WHEN MAKING a purchase, ponder not just its virtues, but also the maintenance, repairs and other hassles involved—because those’ll eventually loom large. Take the country home. It may initially seem like a great escape. But soon enough, you’ll be just as focused on the drive back and forth, and on the chores you’ll have to do once you’re there.

Truths

NO. 29: BROKERAGE commissions aren’t your only trading cost. When you buy and sell individual stocks and bonds, or a fund manager does so on your behalf, you lose money to the bid-ask spread—the gap between the lower price at which you can currently sell and the higher price at which you can buy. Wall Street’s market makers pocket the difference.

Think

WEIGHTING RETURNS. Typically, we see time-weighted returns, which reflect our gain over, say, 10 years, assuming we bought at the start of the period and never made any further trades. A dollar-weighted return, by contrast, factors in when we bought and sold. If the market dipped during the 10 years and we invested more, that would boost our dollar-weighted return.

Money Guide

Start Here

Buying a Home

THINKING OF BUYING a home? Before you start bidding on properties, ask yourself six questions: How long will I stay put? If you think you’ll move within five years, perhaps because of your job or because the house you can currently afford won’t really be big enough, buying may not be smart. It would likely be better to wait until you can purchase a place you’ll be happy with for the long haul. How much can I borrow? A mortgage lender may be willing to let you take on total monthly mortgage payments, including principal, interest, homeowner’s insurance and property taxes, equal to 28% or so of your pretax monthly income. We have more on mortgages in the chapter on borrowing. How much can I put down? Ideally, you should save enough to put down 20% of the purchase price, so you avoid taking out private mortgage insurance, or PMI. Even if you can’t scrape together 20%, the more you put down, the less you may have to pay in PMI. Coming up short? You might be eligible to make a $10,000 penalty-free withdrawal from your individual retirement account and, if married, your spouse could do the same. The $10,000 is a lifetime limit, and the provision can be used only by those who haven’t owned a house within the past two years. The down payment isn’t the only cost you will incur. Mortgage application fees, legal costs, a home inspection and title insurance could easily amount to $3,000 to $6,000, and maybe more. Where should I buy? In tackling that question, give particular thought to two issues. First, are the schools good? If not, you might find yourself paying for private schools, which is an expensive proposition. Even if you don’t have children, good schools can bolster property prices—though it also means it costs more to buy into the neighborhood and property taxes are likely higher. Second, how long will your commute be? Research suggests that a long commute is one of the biggest causes of unhappiness. What other costs will I face? Beyond the down payment and closing costs, give some thought to other expenses you might incur. What are the property taxes? Will you need to spend substantial sums on remodeling, either immediately or within the first few years? Should I use a real estate agent? While sellers typically use a real estate agent, there’s less need if you are buying—and it could put you in a weaker bargaining position. Yes, by retaining a real estate agent, you may hear about properties before they hit the public listings. But if you’re negotiating with a seller, you may also find there’s less wiggle room if you use a realtor. If a seller’s agent is looking at earning the entire commission, he or she might shave the commission to bridge the difference between what a buyer is offering and what a seller will accept. But if the seller’s agent will have to split the commission with a buyer’s broker, the agent may be less willing to cut the commission. Next: Selling a Home Previous: Jonathan's Story: Homes Blogs: Heading Home (I), (II), (III), (IV), (V)The $121,500 Guestroom, Home Economics and Five Steps to Your Own Front Door
Read more »

Archive

Under Construction

TO MY WAY of thinking, it is inexcusable that we’ve reached the point where there's even the possibility that Social Security may not be able to pay full benefits 16 years from now. Americans are scared by the prospect. Some have even given up hope that the program will continue to exist. Back in 2000, Social Security's Trustees urged action: “In view of the size of the financial shortfall in the [Old-Age, Survivors and Disability Insurance] program over the next 75 years, we again urge that the long-range deficits of both the [Old-Age and Survivors Insurance] and [Disability Insurance] Trust Funds be addressed in a timely way. It is important to address both the OASI and DI problems well before any necessary changes take effect, to allow time for phasing in such changes and for workers to adjust their retirement plans to take account of those changes.” Similar warnings, urging action sooner rather than later, are contained in every Trustees report since 2000. And yet nothing significant has been done to solve the problem. To apply another band-aid, Congress in 2017 authorized the temporary reallocation of the payroll tax from the old-age fund to the disability fund for years 2016 through 2018. That was because the disability fund was running out of money sooner than the old-age trust. It isn’t hard to craft a balanced combination of changes that will fix the problem. I cooked up my own solution using the calculator on the Committee for a Responsible Federal Budget website. These changes would make Social Security solvent for the next 75 years. You may have better ideas. But the point is, a combination of changes will easily fix Social Security and increase benefits. My proposed fix:
  • Increase initial benefits by 5%.
  • Raise the normal retirement age by one year to 68.
  • Change the index for cost-of-living adjustments to CPI-E, which more closely reflects retiree costs.
  • Increase the payroll tax by 2.5 percentage points, with half coming from each worker and half from their employers. It could be less for workers, but only if the payroll tax increase was greater on employers.
  • Apply the payroll tax to 90% of wages, while also increasing benefits for those who end up paying more in payroll tax. This still generates additional net revenue, because today’s Social Security benefit formula favors lower paid workers (or, to put it another way, higher earners effectively receive a lower return on the payroll tax they pay).
  • Cover newly hired non-federal government employees who currently do not contribute to Social Security. This should allow states to adjust their public pensions and lower long-term liabilities.
  • Apply the Social Security payroll tax to the cafeteria plans offered by many employers. When employees pay for health benefits offered through their employer, they pay with dollars that are not only income-tax-free, but also escape the payroll tax.
  • Diversify a portion of the Social Security Trust funds away from Treasury bonds and into other investments, including stocks, with a view to earning higher returns. Given the long-term nature of Social Security’s financial obligations, such a move would involve minimal risk.
With the above plan, no current retirees are harmed, while the impact on current workers is modest. Nobody likes higher taxes of any kind. But let’s face it: Social Security is part of our social and economic fabric. Americans will continue to rely on Social Security for a significant portion of their retirement income—and we need to agree on a fix. Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous blogs include Get Me the DoctorRunning in Place and Tortoises Needed. Follow Dick on Twitter @QuinnsComments.
Read more »