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It All Depends

Adam M. Grossman

MANY FINANCIAL questions have clear answers. Does it make sense to engage in day trading? Probably not. Should you invest everything in bitcoin? I wouldn’t recommend it. Is it smart to carry a big credit card balance? It’s hard to think of a good reason.

Many other financial questions, though, might seem to have clear answers. But upon closer examination, they actually fall into the “it depends” category. Below are six such questions:

1. Should I waste money? Consider two investors. One has a $500,000 portfolio. The other used to have a $500,000 portfolio. But now he has just $200,000—after spending the other $300,000 on a Ferrari. Most people would probably view the first investor as being a better steward of his finances and the second as a terrible money waster. But was that Ferrari really a waste? I think it depends.

Let’s set aside the question of whether the car might become a collector’s item and thus appreciate in value. Instead, let’s just see it for what it is: an exceptionally expensive toy. Through that lens, is it a waste of money? If so, is that okay? In my view, there’s a fundamental litmus test to answer this question. You should simply ask: Will this expense jeopardize my long-term plan? In the above example, suppose the Ferrari owner has other sources of income—such as a government pension or maybe income from a rental property. If that’s the case, his portfolio’s size might not matter and objectively it wouldn’t be an irresponsible choice.

The bottom line: Some might see a six-figure car—or a similar extravagance—as an egregious waste. But if you can afford something, and if it will bring you happiness, then that’s what matters. We’re each different and value different things. I wouldn’t let anyone else judge you—and I wouldn’t feel the need to judge yourself.

2. Should I own international stocks? Jack Bogle, founder of Vanguard Group, was famous for saying that he never owned international stocks in his personal portfolio. He didn’t see the need. Bogle certainly had the data to support his view. The correlation between U.S. and international stocks is usually between 0.7 and 0.9. Correlations are measured on a scale from -1 to 1, so this indicates a high level of correlation.

By contrast, many bonds have very low correlations with stocks. In other words, international stocks offer some diversification benefit, but it’s limited. Bonds, on the other hand, offer a far easier and more effective route to a diversified portfolio. Does that mean that, like Bogle, you shouldn’t own international stocks? It depends.

There’s an important reason an investor might want international stocks. Yes, Bogle was right that international and domestic stocks are highly correlated. Still, they aren’t perfectly correlated. Because of this, Vanguard’s own research indicates that an allocation between 20% and 40% to international stocks might yield the optimal diversification benefit. International stocks can indeed help lower a portfolio’s volatility.

But if, like Bogle, you prize simplicity and don’t mind a little more volatility, then you might forgo international stocks. Remember, there’s a difference between reducing a portfolio’s volatility and increasing its returns. International diversification has been proven to deliver only the former—but not necessarily the latter.

3. Should I cancel my life insurance policy if I no longer need it? If your assets have grown over the years, and your children are out of the house, the math might indicate you no longer need life insurance. Does this mean you should cancel it? It depends. There are at least two cases in which you might decide to retain a policy, at least for the time being.

If you have a policy with some cash value, such as a whole-life policy, you’ll want to do the math carefully. It may be that the accumulated gains in the cash value would leave you with a big tax bill if you liquidated the policy. If that’s the case, you might keep the policy going until retirement, when you could be in a lower tax bracket. In the meantime, you might look into a 1035 exchange to lower the annual carrying costs.

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The other reason you might retain life insurance even when the math says you don’t need to: because life is uncertain. I’ve seen more than one family choose to retain life insurance beyond when it’s objectively necessary. If it provides additional peace of mind, and the cost isn’t burdensome, I see nothing wrong with that.

4. Should I worry about estate taxes if I’m clearly under the federal exclusion—currently $12 million per person? It depends. The first thing to know: In 2026, the current estate tax laws will sunset, and that $12 million limit will be cut in half to $6 million. More important, none of us knows how long we will live. Because the estate tax is a political football, there’s no way to know what rules will be in place in the year we happen to die. George Steinbrenner got lucky, but that’s more the exception than the rule. I see estate planning as an important exercise for all high-net-worth families.

Another reason to take estate tax planning seriously: While the federal tax is the one most people worry about, don’t forget that many states also levy their own taxes, with exclusions that start at much lower levels. In Massachusetts, for example, the estate tax applies to those with just $1 million of assets.

5. Should I contribute to my 401(k) or 403(b)? If you’re in the heart of your working years and in a high tax bracket, it might seem smart to defer taxable income into a retirement account. But is this always the right choice? It depends. The fundamental consideration is whether your tax rate this year will be higher or lower than you expect it to be in retirement. In many—if not most—cases, this is an easy question to answer. Without a salary in retirement, it stands to reason that your tax rate will drop considerably. But that’s not true in all cases.

Suppose you have rental properties that generate considerable income. Or maybe you have a traditional pension. Or maybe you’ve taken advantage of additional tax-deferred accounts over the years, such as a cash-balance pension plan, that’ll result in substantial required minimum distributions. In all those cases, your tax rate might be just as high in retirement. That’s why, especially as your career advances, it’s important each year to do the math before making further retirement contributions.

6. Should my asset allocation get more conservative as I get older? The answer to this might seem obvious. But there are cases in which it makes sense to increase your allocation to stocks as you get older. Suppose, for example, you have a $5 million portfolio with an asset allocation of 50% in stocks and 50% in bonds. Let’s also suppose that you’re planning to take out $1 million for a summer home in the year you retire. After that, your portfolio probably doesn’t need to be as conservative. Because a significant goal will now be behind you, you might be able to lift your stock allocation to, say, 60%.

Another example: Suppose you retire at age 65 but delay Social Security until 70. Without Social Security benefits during those initial years, your portfolio withdrawals will be higher than they’ll be after age 70. All things being equal, you’d want your portfolio to be positioned more conservatively during your retirement’s first five years. You could then get more aggressive later, when your withdrawal rate will be lower.

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 Twitter @AdamMGrossman and check out his earlier articles.

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Jo Bo
Jo Bo
2 months ago

Thanks, Adam, for the useful information.

As to Item 3, I rationalized making maximum contributions to my 403(b) in several ways. First, the tax savings itself can be invested and grow over the years. Second, predicting future tax regulations is not possible, so use the current ones to maximum benefit. And third, idealistically, paying taxes eventually on tax sheltered income and earnings is a civic duty. I see that last one as a fair tradeoff, for the privilege of having the 403(b) in the first place.

Charlie Warner Jr
Charlie Warner Jr
2 months ago

Thanks Adam, you made a statement “I see estate planning as an important exercise for all high-net-worth families.” From a dollar standpoint, how do you define high net worth families?

Joey
Joey
2 months ago

Generally speaking, I define “high net worth” and “people who have more money than me”

Charlie Warner Jr
Charlie Warner Jr
2 months ago
Reply to  Joey

good answer

Newsboy
Newsboy
2 months ago

This is a great list, Adam…Indeed, there are many “shades of grey” to conventional wisdom on finances as we approach retirement.

I would note that #3 (life insurance needs) and #4 (estate taxes) are conveniently listed right next to each other. There is, indeed, high correlation between the two items, particularly for high net worth households.

From my own perspective, not knowing what the estate tax laws will look like after 2026, I would lean towards not being in any great hurry to cancel current life coverage (particularly for those with a HH net worth projected to exceed 6 million on or before 2026) until we see what the next election cycle brings into power in D.C..

It’s worth noting that interest has been building among higher net worth families around transferring ownership of individually purchased life coverage into an Irrevocable Life Insurance Trust (ILIT), given the pending estate tax cap reduction in 2026. This strategy assumes that congress doesn’t take action before 2026 to extend the current 12 million exemption. For families blessed with a higher net worth, this is certainly a “checklist items” to review with a capable CPA and an estate planning attorney.

Likewise, there are already some rumblings that our ballooning federal deficit will resurrect debate in Washington (likely after the November elections) around eliminating the capital gains tax “step up” valuation at death on non-qualified assets left to heirs.

From my view – if my other HH expenses are more than adequately covered with our income, and my life premium payments are level (and projected to stay level at least through 2026) – well then I’m really not in any great hurry to cancel life coverage and walk away from a potential income tax-free bucket of cash being available to my beneficiaries at the time of my premature death.

Given the current political uncertainty around future estate tax exclusion amounts and capital gains rate, for our family perhaps the best near-term action on our current life insurance is taking no action.

Last edited 2 months ago by Newsboy

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