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Wall Street Trap

IN THE INVESTMENT world, May 1st is a notable day. It was on May 1, 1975 that the Securities and Exchange Commission deregulated the brokerage industry. For the 183 years prior to that, trading commissions on the New York Stock Exchange had been fixed at uniformly high rates. But when deregulation arrived, competition got going. That’s when discount brokers like Charles Schwab got rolling, and over time, May Day, as it’s now referred to, has delivered enormous savings to consumers. More than 50 years later, though, Wall Street still operates in ways that are often at odds with consumer interests. As an individual investor, what are the obstacles to be aware of? At the top of the list is Wall Street’s fixation with individual stocks. For almost 100 years, the data has been clear that stock-picking is counterproductive. Probably the first to uncover this was a fellow named Alfred Cowles. Cowles came from a wealthy family and wondered whether the investment advice his family had been receiving was worthwhile. He set about answering that question and in 1933, published a paper titled “Can Stock Market Forecasters Forecast?” Cowles’s conclusion: They can’t. More recently, research by finance professors Brad Barber and Terrance Odean came to a similar conclusion. The title of their most well known paper is self-explanatory: “Trading Is Hazardous to Your Wealth.”  Along the same lines, Standard & Poor’s regularly examines actively-managed mutual funds to see how many are able to outperform the overall market. The most recent finding: Over the past 10 years, fewer than 15% of funds benchmarked to the S&P 500 managed to beat the index. Research by Jeff Ptak at Morningstar has found that the more active a fund is, the worse it performs. So-called tactical funds, which shift among different asset classes in response to economic forecasts have, in Ptak’s words, “incinerated” shareholder dollars. This data is fairly well known. The problem, though, is that trading activity generates revenue for the brokerage industry, so it has an interest in keeping investors engaged with the market. That’s why brokerage analysts are on TV every day, offering their forecasts for individual stocks, for the overall market and for the broader economy. To be sure, this makes for interesting television. The problem, though, is that it’s been shown to carry almost no value. According to research by Joachim Klement, the accuracy of Wall Street prognosticators is approximately zero. Why are they so poor at forecasting? For starters, there’s the simple fact that no one has a crystal ball. No one can know what a company—or its competitors—will do a month or a year from now, and how that will translate into stock price gains or losses. Sociologist Ezra Zuckerman Sivan uncovered a more subtle explanation. In research published after the technology selloff in 2000, Sivan found that Wall Street analysts are constrained by two obstacles. The first is that they’re dependent on access to companies’ management teams to help in their research. For that reason, it’s in their interest to maintain positive relationships with the companies that they follow. Investment banks that take a positive view on a company may also be rewarded with profitable mergers or acquisitions work when the need arises. Those factors bias stock recommendations overwhelmingly in the direction of “buy” ratings. Another reason analysts tend to avoid negative comments about the companies they cover: Sivan found that there is a community effect that tends to form among the analysts assigned to a given company, and thus an incentive develops to not “rock the boat” in saying anything too critical. People generally want to get along, and that results in a sort of self-censorship. This research is well understood, and yet Wall Street continues to generate forecasts day after day, year after year. Why? There are two explanations, I believe. The first is that it’s entertaining. I’ll be the first to acknowledge that index funds aren’t terribly interesting to talk about. It’s far more interesting to talk about smartphones or AI and the companies behind them. That makes Wall Street analysts invaluable to the media, who need to fill airtime.  And as long as they’re granted that airtime, forecasters are of great value to the brokerage industry. Since trading activity is profitable for Wall Street, it’s in brokers’ interest to generate continued interest in stocks. That brings in commission dollars for brokers. And even though commissions have shrunk in recent years, brokers benefit in other ways from active trading, including the “bid-ask spread” on each trade. That’s the difference between what buyers pay and what sellers receive, and though these spreads are tiny, they add up for the brokers who collect them. For good reason, then, Wall Street continues to promote stock-picking. At the same time, the investment industry is always busy developing new funds. In the first half of last year, for example, fund companies rolled out more than 640 new funds. Among them: funds that hold single stocks with varying degrees of leverage and other seemingly unnecessary new formulations. The result: There are now many more funds than there are stocks trading on U.S. exchanges.  Many of these new funds follow ever more esoteric strategies. They’re often opaque. And almost invariably, they carry higher fees. In a 2011 study titled “The Dark Side of Financial Innovation,” finance professor Brian Henderson and a colleague looked at one popular category of fund known as a structured product. Their conclusion: These funds were overpriced to the point that their expected return was actually a bit below zero. How were they able to market such an inferior product? Henderson’s hypothesis was that the fund companies designed them to be intentionally as complex as possible in order to exploit individual investors. The bottom line: To a great degree, Wall Street is upside down. But as an individual investor, you don’t have to be. My rule of thumb: In building a portfolio, investors should do more or less the opposite of what Wall Street recommends. That, I believe, is a reliable formula for success.   Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
Read more »

Retirement Toys

"That’s what I was wondering, thanks. I think I’ll get a great gas grill and maybe add a smoker later. We do have room in the yard. I’m even thinking about a pizza oven!"
- DrLefty
Read more »

Saving for Grandchildren

OUR FIRST GRANDCHILD recently arrived, which naturally has us thinking about the smartest ways to build a strong financial foundation for her future. In 2019, I wrote Take a Break, which outlined saving strategies on behalf of children. Since then, the landscape has changed with the introduction of Trump accounts and Roth-conversion pathways for 529 accounts.  Families have four tax-advantaged savings approaches on behalf of young children plus the Roth IRA option once the child has earned income – 529 education savings account, a Uniform Gift to Minor (UGM) custodial account, a Coverdell account, and the new Trump account. Each option offers a different mix of tax benefits, contribution requirements and withdrawal rules. 529 Accounts Pros
  • Tax-free growth when used for qualified education expenses
  • High gift-tax contribution limits: $19K per contributor per year (indexed)
  • New ability to convert up to $35K into a Roth IRA for the beneficiary
Cons
  • Relatively complex with penalties and taxes on non-qualified withdrawals
  • Limited, state-approved investment options
  • Risk of underutilization if the child does not pursue qualifying education
Caveats
  • Technology and AI could significantly reduce education’s cost structure in the future
  • Roth conversions are capped at $35K lifetime
  • The 529 must be open 15 years, and contributions must age 5 years before conversion
  • Conversions require the beneficiary to have earned income (i.e. they could Roth anyway)
  • Annual Roth contribution limits still apply (e.g., $7.5K in 2026), so completing the full $35K conversion would take five years
UGM Custodial Accounts Pros
  • Brokerage account where up to $2.7K of unearned income can be tax-free each year
  • High gift-tax contribution limits: $19K per contributor per year (indexed)
  • Broad investment flexibility — stocks, bonds, funds, etc.
  • Few restrictions on how funds may be used for the child’s benefit
  • Potential for low taxes on capital gains, but subject to marginal “kiddie tax” at parent’s rates until tax-independency or age 24 
Cons
  • Higher income or capital gains could trigger the kiddie tax at the parents’ marginal rate
  • Assets count as the child’s for financial-aid purposes
Caveats
  • Custodians have some ability to spend down the account for legitimate child expenses if the child is a wild-child in the later teen years
Coverdell Accounts Pros
  • Tax-free growth for qualified education expenses
  • More flexible investment choices than most 529 plans
Cons
  • Low contribution limit: $2K per year plus income limits restrict who can contribute
  • Essentially irrelevant today given the expanded options within 529 plans
Trump Accounts Pros
  • $1K government seed deposit for children born 2025–2028
  • Contribution limit of $5K per year in 2026, indexed to inflation
  • Parent employers may contribute up to $2.5K per year (also indexed)
  • Tax-deferred growth with Roth-conversion opportunities beginning at age 18
  • No earned-income requirement for Roth conversions 
  • Roth conversions are ideal in low-income years starting after age 18 once the child has transitioned to tax-independency of parents or at age 24 when “kiddie taxation” ends. Early tax independence could even be a combined Roth plus student financial-aid strategy
  • Potential to convert large account values over several years at relatively low tax rates (potentially marginal 10-12% tax-rates, but averaging less due to the standard deduction).
Cons
  • Investment options limited to low-cost indexed stock funds (not necessarily a drawback)
  • Penalty-free withdrawals must wait until age 59½, but the accounts could be advantageous even including penalties
  • Limited custodian control and intervention possibilities if the teen is a wild-child
Caveats
  • If Roth conversions are not undertaken during the child’s low-income years, a UGMA invested to capture long-term capital gains tax-rates may outperform a Trump Account taxed at ordinary income tax-rates
  • Watch this space as future adjustments or eligibility changes are possible
  In effect, the 529 is a two-decade college savings program having some complexity and withdrawal limitations; the UGM is a reasonably flexible, 18-30-year college or house downpayment savings program; and the Trump account is a somewhat inflexible, sixty-year retirement accelerator   Resulting Playbook Here is our family’s intended playbook for tax-advantaged accounts in the grandchild's name:
  • Parents’ retirement account fundings remain their top priority - 401K’s at a minimum up to the match, HSAs with their triple tax advantages, and Roths as long as eligible within income limits.
  • A Trump account has already been initiated to secure the free $1K government seed contribution – grows to potentially $2.6K at age 18 after penalties and taxes.
  • Limited 529 funding has also been initiated to start the 15-year clock for potential later Roth conversions. 
  • The family’s next priority is to fund the Trump account which starts at $5K later this year. Maximizing the Roth conversion opportunity will require ~$116K of contributions (at 3% inflation) over 18 years which we grandparents intend to help fund. I estimate the Roth converted Trump account could grow to ~$2 million of tax-free money at age 60 (6% growth) assuming early-age Roth conversions, and the Wall Street Journal projects as much as $3 million (link likely paywalled).
  • The subsequent priorities are to start UGM taxable account and 529 account contributions in parallel to perhaps initial levels of about $35K each. This may take our family some years depending upon available resources for contributions.
For the UGM account, a balance of $35K should capture a sizeable chunk of the annual $2.7K tax-free income limit by investing in high-yield income alternatives. For the 529 account, $35K aligns with the Roth conversion limit. On a personal note, we had extremely positive UGM outcomes with our children. We saved taxes for two decades, and each child used the ~$60K balance as down payments on their first house shortly after college. Due to the 529’s withdrawal rigidities and potential technology impacts, we are unlikely to fund the 529 to the max. 
  • We will skip Coverdells as the alternatives offer ample savings opportunity in the child’s name ($200K+). 
  • Depending upon spare resources available for gifting, we can always reassess future contributions. 
That’s our plan, and we’re sticking to it…. until something changes.    John Yeigh is an author, coach and youth sports advocate. His book “Win the Youth Sports Game” was published in 2021. John retired in 2017 from the oil industry, where he negotiated financial details for multi-billion-dollar international projects. Check out his earlier articles.  
Read more »

The reality of Social Security and Medicare- My real life experience.

"Do you actually believe that our high school teachers could even explain finances to their students? When I took a college finance course taught by a stockbroker, he said that to compare taxable bond yield to a tax-exempt bond yield, you just double the coupon of the tax-exempt bond yield. Yikes. This was intended to be a comment on Nick's comment."
- Harry Crawford
Read more »

Is saving really that hard? Nope, not for the great majority of Americans. 

"Difficult requiring great discipline, yes. Impossibility, no. Simply because some people do it. Don’t focus on the $3,000, that’s an illustration. It’s the concept that is important. Many people earning double the amount claim they can’t save. An 8% return for the stock market is pretty close to the average over the last 50 years."
- R Quinn
Read more »

Investing Fundamentals: A Simple Guide for Beginners

"Excellent article. Now let’s forward it to our young relatives and friends who have limited attention spans."
- Nick Politakis
Read more »

Ageing and the Open Road

RECENTLY I TOOK a free ride on a driverless bus trialling its proposed route, part of my local administration's ten-year rollout plan for self-driving public transport and taxis. I see real potential in this technology, and I'm hoping the infrastructure and implementation stay on schedule. That hope is mostly selfish, I'll admit. In fifteen years I'll be in my mid-seventies, and I'd love to ditch my car and rely on cheap, dependable robo-taxis instead. It would give me freedom precisely in that decade of life when driving starts to become genuinely problematic. I'm planning to change my car in 2027 for a modern hybrid, but in the back of my mind is the thought that it could be my last. If the self-driving rollout hits its targets, I can see the case for never buying another. The advantages for someone in my demographic at that stage of life would be hard to argue with. Think about what car ownership actually costs. There's the purchase price, insurance, road tax, fuel, servicing, tyres, and the occasional bill that arrives like a punch to the stomach. For most people, a car is the second most expensive thing they own after their home. In retirement, when income typically drops and budgets tighten, that ongoing drain becomes harder to justify. This is especially true when the car spends the vast majority of its time sitting on a driveway looking pretty. A robo-taxi model, where you pay only for the journeys you actually take, could represent a dramatic shift in how much personal transport really costs. The numbers, I suspect, will be compelling — with current estimates from real world operations suggesting an 80% reduction in the cost of fares being achievable. Then there's the question of independence. This is the one that matters most to me personally, and I'd imagine it resonates with anyone approaching or already in their later years. Giving up your car keys is one of those milestones that nobody really talks about, but everyone in that demographic understands. It represents a loss of spontaneity and self-sufficiency that can genuinely affect quality of life. The difference with autonomous vehicles is that surrendering the wheel doesn't have to mean surrendering the freedom. A reliable, affordable self-driving taxi available on demand restores something that previous generations simply had to go without once driving became difficult. This could be a trip to the supermarket on a weekday morning or a late evening visit to family. The safety dimension is also worth considering. Reaction times slow as we age. Night vision deteriorates. Concentration over long distances becomes harder. Most older drivers are aware of this and manage it carefully, but there comes a point for everyone where the road becomes a source of anxiety rather than freedom. Autonomous vehicles remove that calculation entirely. You get in, state your destination, and arrive, without the cognitive load of navigating, anticipating other drivers, or worrying whether your responses are still sharp enough. That peace of mind shouldn't be underestimated. There are wider social benefits too. Older people who can no longer drive are disproportionately affected by isolation. Poor rural transport links, infrequent bus services, and the general assumption that everyone has access to a car all contribute to a situation where many retired people find their world gradually shrinking. Autonomous vehicles, particularly if integrated intelligently with existing public transport, have the potential to reverse that. A robo-taxi that can be summoned by a smartphone, or even a simple voice command, could keep people connected to their communities, their families, and their routines far longer than is currently possible. There are, of course, reasons to be cautious. Technology rollouts rarely go entirely to plan. The ten-year schedule my local administration is working to is ambitious, and a lot can change in funding priorities, in public appetite, and in the regulatory environment. The early trials are promising, but promising trials and full-scale dependable infrastructure are very different things. It's worth keeping in mind, with a groan inducing pun: your mileage will vary — literally. Dense urban and suburban areas will almost certainly see reliable services first, and I'm fortunate that describes my situation. For those in more rural communities, the very people for whom isolation is already the sharpest problem, the wait could be considerably longer. I'm hopeful, but I'm not banking on it entirely. Which is why the 2027 hybrid still makes sense. It's a practical hedge, a good, modern, efficient car that will serve me well through the transition years, whatever pace that transition takes. But the fact that I'm already thinking of it as potentially my last car feels significant. A decade ago that thought wouldn't have crossed my mind. The technology has moved from science fiction to credible near-future fast enough to genuinely reshape how I'm thinking about retirement planning. If it delivers, the generation hitting their seventies in the late 2030s could be the first in history for whom ageing and mobility don't have to be in conflict. That's not a small thing. That might turn out to be one of the most personally transformative shifts of the entire autonomous vehicle revolution. It is not about the flashy early adopters or the logistics industry efficiencies. Instead, it is the simple dignity of an older person getting where they need to go, independently, on their own terms. I'm hopeful I'll be taking that ride and certain my children and grandchildren definitely will.
Mark Crothers is a retired small business owner from the UK with a keen interest in personal finance and simple living. Married to his high school sweetheart, with daughters and grandchildren, he knows the importance of building a secure financial future. With an aversion to social media, he prefers to spend his time on his main passions: reading, scratch cooking, racket sports, and hiking.
Read more »

Tax Free Income Trap, Dealing With MAGI

"Agree! When it comes to Roth conversions, tax arbitrage is usually the focus of discussion, but “portfolio return“ arbitrage (if that’s a proper term?) is usually less mentioned."
- Andy Morrison
Read more »

A Life You Build

"Jeff, That is an incredible article. One of if not the best HD articles I’ve ever read.That moved me. As I was reading I was thinking to mention a couple of the most inspiring takeaways you included but there were so many. Thank you so much for taking the time to write and share this piece with the HD community. Ideally, I hope this reaches way beyond HD. Well done on your life’s journey and well done capturing it here!"
- Andy Morrison
Read more »

Blood Money

"On April 30 (with WTI closing at $105.07/bbl.) I sold another 10% of my XOM shares @ $154.413 (up nicely from it mid-month low of $146.44). Plan is to continue selling next month."
- mflack
Read more »

New Face, old scam

"Thanks. Good to see you contributing again."
- Jeff Bond
Read more »

Wall Street Trap

IN THE INVESTMENT world, May 1st is a notable day. It was on May 1, 1975 that the Securities and Exchange Commission deregulated the brokerage industry. For the 183 years prior to that, trading commissions on the New York Stock Exchange had been fixed at uniformly high rates. But when deregulation arrived, competition got going. That’s when discount brokers like Charles Schwab got rolling, and over time, May Day, as it’s now referred to, has delivered enormous savings to consumers. More than 50 years later, though, Wall Street still operates in ways that are often at odds with consumer interests. As an individual investor, what are the obstacles to be aware of? At the top of the list is Wall Street’s fixation with individual stocks. For almost 100 years, the data has been clear that stock-picking is counterproductive. Probably the first to uncover this was a fellow named Alfred Cowles. Cowles came from a wealthy family and wondered whether the investment advice his family had been receiving was worthwhile. He set about answering that question and in 1933, published a paper titled “Can Stock Market Forecasters Forecast?” Cowles’s conclusion: They can’t. More recently, research by finance professors Brad Barber and Terrance Odean came to a similar conclusion. The title of their most well known paper is self-explanatory: “Trading Is Hazardous to Your Wealth.”  Along the same lines, Standard & Poor’s regularly examines actively-managed mutual funds to see how many are able to outperform the overall market. The most recent finding: Over the past 10 years, fewer than 15% of funds benchmarked to the S&P 500 managed to beat the index. Research by Jeff Ptak at Morningstar has found that the more active a fund is, the worse it performs. So-called tactical funds, which shift among different asset classes in response to economic forecasts have, in Ptak’s words, “incinerated” shareholder dollars. This data is fairly well known. The problem, though, is that trading activity generates revenue for the brokerage industry, so it has an interest in keeping investors engaged with the market. That’s why brokerage analysts are on TV every day, offering their forecasts for individual stocks, for the overall market and for the broader economy. To be sure, this makes for interesting television. The problem, though, is that it’s been shown to carry almost no value. According to research by Joachim Klement, the accuracy of Wall Street prognosticators is approximately zero. Why are they so poor at forecasting? For starters, there’s the simple fact that no one has a crystal ball. No one can know what a company—or its competitors—will do a month or a year from now, and how that will translate into stock price gains or losses. Sociologist Ezra Zuckerman Sivan uncovered a more subtle explanation. In research published after the technology selloff in 2000, Sivan found that Wall Street analysts are constrained by two obstacles. The first is that they’re dependent on access to companies’ management teams to help in their research. For that reason, it’s in their interest to maintain positive relationships with the companies that they follow. Investment banks that take a positive view on a company may also be rewarded with profitable mergers or acquisitions work when the need arises. Those factors bias stock recommendations overwhelmingly in the direction of “buy” ratings. Another reason analysts tend to avoid negative comments about the companies they cover: Sivan found that there is a community effect that tends to form among the analysts assigned to a given company, and thus an incentive develops to not “rock the boat” in saying anything too critical. People generally want to get along, and that results in a sort of self-censorship. This research is well understood, and yet Wall Street continues to generate forecasts day after day, year after year. Why? There are two explanations, I believe. The first is that it’s entertaining. I’ll be the first to acknowledge that index funds aren’t terribly interesting to talk about. It’s far more interesting to talk about smartphones or AI and the companies behind them. That makes Wall Street analysts invaluable to the media, who need to fill airtime.  And as long as they’re granted that airtime, forecasters are of great value to the brokerage industry. Since trading activity is profitable for Wall Street, it’s in brokers’ interest to generate continued interest in stocks. That brings in commission dollars for brokers. And even though commissions have shrunk in recent years, brokers benefit in other ways from active trading, including the “bid-ask spread” on each trade. That’s the difference between what buyers pay and what sellers receive, and though these spreads are tiny, they add up for the brokers who collect them. For good reason, then, Wall Street continues to promote stock-picking. At the same time, the investment industry is always busy developing new funds. In the first half of last year, for example, fund companies rolled out more than 640 new funds. Among them: funds that hold single stocks with varying degrees of leverage and other seemingly unnecessary new formulations. The result: There are now many more funds than there are stocks trading on U.S. exchanges.  Many of these new funds follow ever more esoteric strategies. They’re often opaque. And almost invariably, they carry higher fees. In a 2011 study titled “The Dark Side of Financial Innovation,” finance professor Brian Henderson and a colleague looked at one popular category of fund known as a structured product. Their conclusion: These funds were overpriced to the point that their expected return was actually a bit below zero. How were they able to market such an inferior product? Henderson’s hypothesis was that the fund companies designed them to be intentionally as complex as possible in order to exploit individual investors. The bottom line: To a great degree, Wall Street is upside down. But as an individual investor, you don’t have to be. My rule of thumb: In building a portfolio, investors should do more or less the opposite of what Wall Street recommends. That, I believe, is a reliable formula for success.   Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
Read more »

Retirement Toys

"That’s what I was wondering, thanks. I think I’ll get a great gas grill and maybe add a smoker later. We do have room in the yard. I’m even thinking about a pizza oven!"
- DrLefty
Read more »

Saving for Grandchildren

OUR FIRST GRANDCHILD recently arrived, which naturally has us thinking about the smartest ways to build a strong financial foundation for her future. In 2019, I wrote Take a Break, which outlined saving strategies on behalf of children. Since then, the landscape has changed with the introduction of Trump accounts and Roth-conversion pathways for 529 accounts.  Families have four tax-advantaged savings approaches on behalf of young children plus the Roth IRA option once the child has earned income – 529 education savings account, a Uniform Gift to Minor (UGM) custodial account, a Coverdell account, and the new Trump account. Each option offers a different mix of tax benefits, contribution requirements and withdrawal rules. 529 Accounts Pros
  • Tax-free growth when used for qualified education expenses
  • High gift-tax contribution limits: $19K per contributor per year (indexed)
  • New ability to convert up to $35K into a Roth IRA for the beneficiary
Cons
  • Relatively complex with penalties and taxes on non-qualified withdrawals
  • Limited, state-approved investment options
  • Risk of underutilization if the child does not pursue qualifying education
Caveats
  • Technology and AI could significantly reduce education’s cost structure in the future
  • Roth conversions are capped at $35K lifetime
  • The 529 must be open 15 years, and contributions must age 5 years before conversion
  • Conversions require the beneficiary to have earned income (i.e. they could Roth anyway)
  • Annual Roth contribution limits still apply (e.g., $7.5K in 2026), so completing the full $35K conversion would take five years
UGM Custodial Accounts Pros
  • Brokerage account where up to $2.7K of unearned income can be tax-free each year
  • High gift-tax contribution limits: $19K per contributor per year (indexed)
  • Broad investment flexibility — stocks, bonds, funds, etc.
  • Few restrictions on how funds may be used for the child’s benefit
  • Potential for low taxes on capital gains, but subject to marginal “kiddie tax” at parent’s rates until tax-independency or age 24 
Cons
  • Higher income or capital gains could trigger the kiddie tax at the parents’ marginal rate
  • Assets count as the child’s for financial-aid purposes
Caveats
  • Custodians have some ability to spend down the account for legitimate child expenses if the child is a wild-child in the later teen years
Coverdell Accounts Pros
  • Tax-free growth for qualified education expenses
  • More flexible investment choices than most 529 plans
Cons
  • Low contribution limit: $2K per year plus income limits restrict who can contribute
  • Essentially irrelevant today given the expanded options within 529 plans
Trump Accounts Pros
  • $1K government seed deposit for children born 2025–2028
  • Contribution limit of $5K per year in 2026, indexed to inflation
  • Parent employers may contribute up to $2.5K per year (also indexed)
  • Tax-deferred growth with Roth-conversion opportunities beginning at age 18
  • No earned-income requirement for Roth conversions 
  • Roth conversions are ideal in low-income years starting after age 18 once the child has transitioned to tax-independency of parents or at age 24 when “kiddie taxation” ends. Early tax independence could even be a combined Roth plus student financial-aid strategy
  • Potential to convert large account values over several years at relatively low tax rates (potentially marginal 10-12% tax-rates, but averaging less due to the standard deduction).
Cons
  • Investment options limited to low-cost indexed stock funds (not necessarily a drawback)
  • Penalty-free withdrawals must wait until age 59½, but the accounts could be advantageous even including penalties
  • Limited custodian control and intervention possibilities if the teen is a wild-child
Caveats
  • If Roth conversions are not undertaken during the child’s low-income years, a UGMA invested to capture long-term capital gains tax-rates may outperform a Trump Account taxed at ordinary income tax-rates
  • Watch this space as future adjustments or eligibility changes are possible
  In effect, the 529 is a two-decade college savings program having some complexity and withdrawal limitations; the UGM is a reasonably flexible, 18-30-year college or house downpayment savings program; and the Trump account is a somewhat inflexible, sixty-year retirement accelerator   Resulting Playbook Here is our family’s intended playbook for tax-advantaged accounts in the grandchild's name:
  • Parents’ retirement account fundings remain their top priority - 401K’s at a minimum up to the match, HSAs with their triple tax advantages, and Roths as long as eligible within income limits.
  • A Trump account has already been initiated to secure the free $1K government seed contribution – grows to potentially $2.6K at age 18 after penalties and taxes.
  • Limited 529 funding has also been initiated to start the 15-year clock for potential later Roth conversions. 
  • The family’s next priority is to fund the Trump account which starts at $5K later this year. Maximizing the Roth conversion opportunity will require ~$116K of contributions (at 3% inflation) over 18 years which we grandparents intend to help fund. I estimate the Roth converted Trump account could grow to ~$2 million of tax-free money at age 60 (6% growth) assuming early-age Roth conversions, and the Wall Street Journal projects as much as $3 million (link likely paywalled).
  • The subsequent priorities are to start UGM taxable account and 529 account contributions in parallel to perhaps initial levels of about $35K each. This may take our family some years depending upon available resources for contributions.
For the UGM account, a balance of $35K should capture a sizeable chunk of the annual $2.7K tax-free income limit by investing in high-yield income alternatives. For the 529 account, $35K aligns with the Roth conversion limit. On a personal note, we had extremely positive UGM outcomes with our children. We saved taxes for two decades, and each child used the ~$60K balance as down payments on their first house shortly after college. Due to the 529’s withdrawal rigidities and potential technology impacts, we are unlikely to fund the 529 to the max. 
  • We will skip Coverdells as the alternatives offer ample savings opportunity in the child’s name ($200K+). 
  • Depending upon spare resources available for gifting, we can always reassess future contributions. 
That’s our plan, and we’re sticking to it…. until something changes.    John Yeigh is an author, coach and youth sports advocate. His book “Win the Youth Sports Game” was published in 2021. John retired in 2017 from the oil industry, where he negotiated financial details for multi-billion-dollar international projects. Check out his earlier articles.  
Read more »

The reality of Social Security and Medicare- My real life experience.

"Do you actually believe that our high school teachers could even explain finances to their students? When I took a college finance course taught by a stockbroker, he said that to compare taxable bond yield to a tax-exempt bond yield, you just double the coupon of the tax-exempt bond yield. Yikes. This was intended to be a comment on Nick's comment."
- Harry Crawford
Read more »

Is saving really that hard? Nope, not for the great majority of Americans. 

"Difficult requiring great discipline, yes. Impossibility, no. Simply because some people do it. Don’t focus on the $3,000, that’s an illustration. It’s the concept that is important. Many people earning double the amount claim they can’t save. An 8% return for the stock market is pretty close to the average over the last 50 years."
- R Quinn
Read more »

Investing Fundamentals: A Simple Guide for Beginners

"Excellent article. Now let’s forward it to our young relatives and friends who have limited attention spans."
- Nick Politakis
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Ageing and the Open Road

RECENTLY I TOOK a free ride on a driverless bus trialling its proposed route, part of my local administration's ten-year rollout plan for self-driving public transport and taxis. I see real potential in this technology, and I'm hoping the infrastructure and implementation stay on schedule. That hope is mostly selfish, I'll admit. In fifteen years I'll be in my mid-seventies, and I'd love to ditch my car and rely on cheap, dependable robo-taxis instead. It would give me freedom precisely in that decade of life when driving starts to become genuinely problematic. I'm planning to change my car in 2027 for a modern hybrid, but in the back of my mind is the thought that it could be my last. If the self-driving rollout hits its targets, I can see the case for never buying another. The advantages for someone in my demographic at that stage of life would be hard to argue with. Think about what car ownership actually costs. There's the purchase price, insurance, road tax, fuel, servicing, tyres, and the occasional bill that arrives like a punch to the stomach. For most people, a car is the second most expensive thing they own after their home. In retirement, when income typically drops and budgets tighten, that ongoing drain becomes harder to justify. This is especially true when the car spends the vast majority of its time sitting on a driveway looking pretty. A robo-taxi model, where you pay only for the journeys you actually take, could represent a dramatic shift in how much personal transport really costs. The numbers, I suspect, will be compelling — with current estimates from real world operations suggesting an 80% reduction in the cost of fares being achievable. Then there's the question of independence. This is the one that matters most to me personally, and I'd imagine it resonates with anyone approaching or already in their later years. Giving up your car keys is one of those milestones that nobody really talks about, but everyone in that demographic understands. It represents a loss of spontaneity and self-sufficiency that can genuinely affect quality of life. The difference with autonomous vehicles is that surrendering the wheel doesn't have to mean surrendering the freedom. A reliable, affordable self-driving taxi available on demand restores something that previous generations simply had to go without once driving became difficult. This could be a trip to the supermarket on a weekday morning or a late evening visit to family. The safety dimension is also worth considering. Reaction times slow as we age. Night vision deteriorates. Concentration over long distances becomes harder. Most older drivers are aware of this and manage it carefully, but there comes a point for everyone where the road becomes a source of anxiety rather than freedom. Autonomous vehicles remove that calculation entirely. You get in, state your destination, and arrive, without the cognitive load of navigating, anticipating other drivers, or worrying whether your responses are still sharp enough. That peace of mind shouldn't be underestimated. There are wider social benefits too. Older people who can no longer drive are disproportionately affected by isolation. Poor rural transport links, infrequent bus services, and the general assumption that everyone has access to a car all contribute to a situation where many retired people find their world gradually shrinking. Autonomous vehicles, particularly if integrated intelligently with existing public transport, have the potential to reverse that. A robo-taxi that can be summoned by a smartphone, or even a simple voice command, could keep people connected to their communities, their families, and their routines far longer than is currently possible. There are, of course, reasons to be cautious. Technology rollouts rarely go entirely to plan. The ten-year schedule my local administration is working to is ambitious, and a lot can change in funding priorities, in public appetite, and in the regulatory environment. The early trials are promising, but promising trials and full-scale dependable infrastructure are very different things. It's worth keeping in mind, with a groan inducing pun: your mileage will vary — literally. Dense urban and suburban areas will almost certainly see reliable services first, and I'm fortunate that describes my situation. For those in more rural communities, the very people for whom isolation is already the sharpest problem, the wait could be considerably longer. I'm hopeful, but I'm not banking on it entirely. Which is why the 2027 hybrid still makes sense. It's a practical hedge, a good, modern, efficient car that will serve me well through the transition years, whatever pace that transition takes. But the fact that I'm already thinking of it as potentially my last car feels significant. A decade ago that thought wouldn't have crossed my mind. The technology has moved from science fiction to credible near-future fast enough to genuinely reshape how I'm thinking about retirement planning. If it delivers, the generation hitting their seventies in the late 2030s could be the first in history for whom ageing and mobility don't have to be in conflict. That's not a small thing. That might turn out to be one of the most personally transformative shifts of the entire autonomous vehicle revolution. It is not about the flashy early adopters or the logistics industry efficiencies. Instead, it is the simple dignity of an older person getting where they need to go, independently, on their own terms. I'm hopeful I'll be taking that ride and certain my children and grandchildren definitely will.
Mark Crothers is a retired small business owner from the UK with a keen interest in personal finance and simple living. Married to his high school sweetheart, with daughters and grandchildren, he knows the importance of building a secure financial future. With an aversion to social media, he prefers to spend his time on his main passions: reading, scratch cooking, racket sports, and hiking.
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Tax Free Income Trap, Dealing With MAGI

"Agree! When it comes to Roth conversions, tax arbitrage is usually the focus of discussion, but “portfolio return“ arbitrage (if that’s a proper term?) is usually less mentioned."
- Andy Morrison
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Manifesto

NO. 40: WE SHOULD all know the minimum dollar amount we need each month to keep our financial life afloat. This will drive our emergency fund’s size and our cash holdings once we’re retired.

act

INVESTIGATE a reverse mortgage. Once you're retired, borrowing against your home’s value shouldn’t be a first choice, but a last resort. Still, it’s helpful—and comforting—to know what that last resort might be worth. To that end, try playing with a reverse mortgage calculator. Pay attention to the money you’ll receive—and to the hefty fees you will incur.

Truths

NO. 111: WALL STREET tries never to send us a bill, so we’re unaware of how much we’re paying. Fund expenses and financial advisor fees are quietly subtracted throughout the year. Stock trading spreads and bond markups are built into security prices. Load mutual fund commissions are swiped from our initial investment or they're deducted when we sell.

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GO TO THE LIBRARY. You can borrow DVDs, rather than paying to stream movies and TV shows. You can cancel your magazine and newspaper subscriptions, and peruse the library’s periodicals instead. You can borrow the latest books, rather than ordering from Amazon. All this will get you out of the house, meeting your neighbors and reading more—at no cost.

Our favorite investment: index funds

Manifesto

NO. 40: WE SHOULD all know the minimum dollar amount we need each month to keep our financial life afloat. This will drive our emergency fund’s size and our cash holdings once we’re retired.

Spotlight: Happiness

Happiness at Home

I HAVE READ THAT spending on experiences brings more happiness than spending on things. But what about the experience of buying? Can that make us happy?
I’ve lived in my small community for 21 years. Over that time, my regular buying habits have led me to discover people who provide me with excellent service. They also supply me with a generous measure of genuine satisfaction.
Every third Friday, I sit and listen to a great raconteur as he cuts my hair.

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Sick and Tired

BETWEEN 1972 AND 2018, the percentage of Americans who described themselves as very happy ranged from 29% to 38%. The number for 2021 was recently released: Just 19% of us said we’re very happy—10 percentage points lower than any prior survey.
Our happiness, it seems, is another victim of the pandemic. Indeed, COVID-19 and the resulting social isolation has delivered a bigger blow to our collective happiness than 2008-09’s Great Recession, 2001’s terrorist attacks and countless other distressing events from the past half-century.

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Around the Obstacles

I WAS 48 years old when the judgement was final and the papers were signed. My former wife and I split our net worth 50/50. There were no arguments over household items like furniture; I didn’t care about that stuff. Pam gladly accepted my proposal that she keep the house, and all its equity, in exchange for me keeping an offsetting amount of the IRAs and my 401(k), a very good move for my future self.

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Doin’ the Charleston

I WROTE RECENTLY about my wife’s lifelong love of traveling, and of my resolve to get in step with her as she resumes her rambles. To that end, earlier this summer, I drove our family to Charleston, South Carolina, to attend the retirement ceremony for my cousin Chris, and to see a bit of the city, to boot.
As our departure time approached, we learned that the original schedule for retirement day had been altered.

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Feeling Rich

ON ONE OF OUR TRIPS to visit my in-laws in South Carolina, my mother-in-law asked me what I thought of her home in a 55-plus retirement community.
“It looks like a house,” I said sarcastically.
Her response gave me food for thought. She said, “I feel rich living here.”
My mother-in-law’s home was far from being a McMansion. It was a single-story two-bedroom house, but it had cathedral ceilings. I think it was the high ceilings that,

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Let’s Get Happy

AMERICA’S HAPPINESS plunged during the pandemic. I’d assumed that survey result was an aberration, and perhaps that’ll still prove to be the case. But recovery sure hasn’t come quickly.
There was no General Social Survey in 2020, when COVID-19 struck. But the following year’s survey found that just 19% of Americans described themselves as very happy—the lowest reading since the survey was first conducted in 1972. The “very happy” group rose to 25% in 2022,

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Spotlight: Friedman

Two Innovations That Can Improve Your Health

There appear to be many wealthy folks trying to live longer. Billionaires, including Jeff Bezos, are making large investments in the research of the aging process. I read about one tech entrepreneur who spends $2 million a year in an attempt to turn back the clock. Equinox, an upscale gym, offers a $40,000 a year membership that helps you live “100 healthy years.” It includes biomarkers and fitness tests to measure your health. Then they use the data to create your own personalized health and fitness plan that includes coaches and trainers. I don’t put a lot of stock in much of what I read about what the anti-aging movement is doing. I’m not convinced that those types of endeavors will amount to meaningful results. But I do believe advances in medication and other medical innovations can. Leana Wen writes in The Washington Post about five medical innovations that can improve your health and well-being. Here are two of the medical breakthroughs I’d be willing to try, and they won’t cost a lot of money: A blood test that can detect colon cancer. Colorectal cancer is the second leading cause of cancer death in the United States. Unfortunately, 1 in 3 people who should get screened for colorectal cancer have never been tested. One reason is they probably, like me, hate the idea of prepping for a colonoscopy. There is a new blood test that can “detect more than 87%  of early-stage cancers.” It has been approved by the FDA and it’s a test that can be done with your other routine blood tests that are prescribed by your doctor. I had my last colonoscopy when I was 72, and was told to come back in 10 years. The American Cancer Society doesn’t recommend a colonoscopy after age 85, for…
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Easier for Rachel

PEOPLE WHO KNOW ME say I’m sentimental, and they’re right. I like visiting places like my elementary school, the house where I grew up and my first home away from home. They bring back fond memories. As I’ve grown older, I’ve become more nostalgic, and it isn’t just me. I heard that the ashes of my childhood friend Brian were spread over our grade school grounds. He must have had a touch of nostalgia, too. I’m not yearning to turn back the clock. I’ve always thought my life has gotten better as I’ve got older. But nowadays, I don’t expect too much from life. If I can just wake up tomorrow feeling okay, that’s good enough for me. Lately, I’ve been on a mission to keep my body moving, because life might pass you by if you don’t. I believe that’s one of the keys to staying fit and vibrant. When we travel, we do most of the heavy-lifting ourselves. We walk, drive and ride a train, bus or boat to our destination, rather than relying on a tour company or a car service. I like to think it helps keep us in good shape mentally and physically. Another plus to our do-it-ourselves traveling is that it costs less and we can take more trips on our $45,000 annual budget. Of course, you can move without having to travel. I like walking the neighborhood, working in our yard and occasionally going on a hike with my wife. I learned a lot about growing old from taking care of my mother. When I was her caregiver, I worried that I’d die before her. I thought her life would be too difficult and painful without my help. She told me many times, “I don’t know what I’d do without you.” Now, I’m…
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A Happy Retirement

AS I MENTIONED IN an earlier article, I've been writing for HumbleDollar since 2017. Along the way, I set a personal goal of writing 100 articles, not counting the 36 shorter blog posts I’ve penned. This is my 99th article. I’m almost there. It may not seem like a lofty goal to many people, but to me it’s been a challenge. After I wrote my first article, it took me a year to write another one. When I did, HumbleDollar’s editor said, “Welcome back.” I actually thought he wouldn’t remember me since it was such a long period between articles. Sometimes, ideas come in bunches and sometimes they’re far between. What I find most difficult when writing about money is finding something to say that’s personal and has value to the reader, while not sounding too much like a broken record. One result: Many of my articles are about my life experiences. The goal of writing 100 HumbleDollar articles is really about finding personal satisfaction. With each article’s publication, I have a sense of accomplishment. This feeling of being pleased and satisfied with myself after performing a meaningful task is sometimes hard to find in retirement. That’s one of the biggest things I miss about working. It’s probably why some people never fully retire. Transitioning to retirement, however, has been relatively easy for me. I credit my relationship with my wife. Since we’re both retired, we spend a lot of time together. It’s important to have a solid relationship with your partner. We have one, especially when it comes to money. I learned an important lesson many years ago about married couples and money: I had a coworker whose husband surprised her with a Mercedes-Benz for her birthday. She was so angry with him for spending so much money that…
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Lessons I’ve Learned

I DIDN'T ALWAYS LIKE my retirement. After I quit my full-time job, I briefly went to work for another aerospace company. It seemed like the perfect arrangement for a retiree: just 16 hours a week, with the luxury of setting my own schedule. But it was the same old pressure cooker environment that I’d wanted to get away from. Although I was working fewer hours, it didn’t feel like I was retired. Instead, it felt like the same old grind. That’s when I realized a successful retirement was less about whether you worked or not, and more about doing things you enjoy. If I’d liked that part-time job, perhaps I would have felt like other folks, who call themselves retired and yet continue to work. That was a key lesson I learned early in retirement. Here are four other important lessons I’ve learned in the years since: 1. Staying independent. In California, if you’re age 70 or older, you have to pass a written test to renew your driver’s license. Many seniors dread the test. When my mother took it, there were 30 questions and you can only miss three. I was so proud of my mother, who at age 92 passed on her first try. My mother was a good driver in her later years. She had no physical or mental ailments that would keep her from driving. She valued her independence, and loved driving to her local grocery store or a nearby restaurant. Except I made one big mistake. After I retired and started spending more time with my mother, I drove her everywhere she wanted to go. By the time it dawned on me that I should let her drive to keep her driving skills sharp, it was too late. She no longer felt comfortable behind the…
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What’s in a Name?

WE USUALLY HAVE Chinese food every Wednesday. It’s our weekly night out for dinner. While waiting outside our favorite restaurant for a table, I heard my wife call out, “Hey, Doe, our table is ready.” That’s what my wife calls me. It’s my new name. She used to call me Dodo. Now, she’s shortened it to Doe. How did this nickname come about? One day, I called myself a dodo for a silly mistake I’d made. That’s all it took for me to have a new name. When I was growing up, my sister and her girlfriends used to call me Denyard and Misha. Even my mother got in the act. She’d sometimes call me Knuckle. My childhood friends called me Denny. Don’t ask me how I got these names. I have no idea, except for the obvious one, Denny. As you can see, Doe is a lot better than some of the other names I’ve been called. It seems like a lot of folks have nicknames. My brother-in-law sometimes calls my sister Daisy. I don’t know where that came from. Some of my mother’s friends used to call her Maybell instead of her real name, Mabel. I even have a nickname for my wife, but I don’t know how to spell it, so I can’t reveal it to you. I had a friend in elementary school whose nickname was Happy. I’m not sure how he got that name, either. When we were in high school, I called him Happy one day. He didn’t like it. He wanted to be called Brian. I get it. He wanted to be seen as an adult, not a child. Many years later, on social media, some of his friends were calling him Happy. He didn’t seem to mind. At that point, he probably…
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Delayed Reaction

IF YOU’VE READ MY articles, you know I don’t respond to readers’ comments very often. It’s not because I’m quiet or shy. Rather, it’s because I like to be thoughtful in my responses, rather than firing off a quick one- or two-sentence answer in the comments section. That brings me to four comments that I’ve found myself pondering, often months or even years after the article appeared. Here’s my belated response to each. Trading up. I wrote an article where I mentioned that we own a 2007 Honda Fit. One reader thought we should get a newer car, so we have the latest safety technology to protect us from aggressive drivers. “If not for yourself, get a newer car to protect your wife,” the commenter said. When we start taking some cross-country road trips, we’d like to buy a newer car with the latest safety features. In fact, our current budget calls for us to purchase a new vehicle this year. But I don’t think that’s going to happen because the Honda Fit is running well, and we don’t drive it very much. Indeed, last year, the car was driven just 545 miles. It’s well maintained and it’s only used for running errands, so we never take it very far from the house. Still, there will be a time when we’ll need another car, and one with the latest safety technology would be a good idea. Maybe the biggest reason I’m putting off buying a newer car is because I’ve had two cars stolen. They were both found, but one had been set on fire and the other was missing most of its parts. The more traumatic theft happened in the early 1970s, when I was 20 years old. I’d bought a Volkswagen Super Beetle and had it for just…
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