What the Devil is an Angel Investor?
April 8, 2021

An angel investor is not necessarily a heavenly creature in white framed by a glow of soft light handing out money to entrepreneurs in need. This week's Q&A focuses on the realities of the angel investor and what their role typically is in the money game. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion. WATCH THE VIDEO

Q: How do I become an angel investor? What's the typical minimum investment amount required?

A: An angel investor (also called a private or seed investor) is typically a wealthy individual or retired entrepreneur that has capital available to invest in a risky new business - a type of venture most investors aren’t willing to or probably shouldn’t back.

Divine Intentions

Individuals often participate in angel investing for reasons apart from pure monetary yield – reasons like the positive feedback of mentoring new entrepreneurs or perhaps simply keeping abreast of developments in particular business environments.

The angel investor usually does so in exchange for ownership equity or convertible debt. Convertible debt is typically a type of bond that an angel investor can convert into a specified number of shares of the new company or cash of equal value. Ownership equity is the ownership of company assets that too often comes burdened with debt or other liabilities attached.

Devil's in the Details

Becoming an angel investor depends in large part on an individual’s financial condition, contacts, and depth of experience in business. Angel investors typically fill the “seed funding” gap between family and friends' assistance and the more robust financing acquired through formal venture capital. There is no minimum investment amount for individual angel investors - investment amounts can range from a few thousand to a few million dollars depending on the financial strength of the individual angel donor.

Angels typically and solely invest their own funds,but some prefer investing in equity crowdfunding – the online offering of private company securities to a group of people for investment. Crowdfunding is often subject to securities and financial regulation, but it enables broad groups of investors with varying degrees of financial strength to fund startup companies in return for a small pieces of those businesses.

Occasionally, an angel investor is part of a founding group and might later actively engage in management of the start-up, but usually in a non-executive position. Why get bogged down in the daily minutiae of running a business?

In Sum

With little question, start-up investments are generally extremely risky, and if success does come, are often diluted by future investment events; thus, they require a very high ROI. According to studies, typical angel investors give less than 10% of their portfolio to start-up endeavors. And because of the frequency of high front-end losses, most professional angels seek target returns of at least 10 or more times their original investment obtainable within five years through some previously defined exit strategy such as an IPO or an acquisition.

The stakes are high… as are the occasional rewards.

Fractional Shares: Bite-Sized Investments with Benefits
April 1, 2021

I am always happy to hear from youngsters who, when money starts burning a hole in their pockets, are looking for ways to invest it rather than just spend it. I am quite intrigued by fractional investing, which is drawing many young investors to the market. In this week's Q&A, I talk about why this bite-sized investing method is gaining traction. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion. WATCH THE VIDEO

Q: What are your best recommendations for a beginner investor starting with less than $500?

A: To be a wise investor, you have to start somewhere, hopefully at a young age. A good place to start - particularly if your saving and/or spending power is limited - is fractional investing. This type of investing is growing in popularity, particularly among younger stock buyers.

What is Fractional Investing?

In fractional investing, people buy affordable "bites" of high-value or high-priced stocks for a fraction of the cost of purchasing a full share of the stock. Because some markets, like the New York Stock Exchange, require investors to buy whole shares of securities, brokerage firms purchase the full shares up front and then sell partial shares to investors, allowing them to purchase quality stocks at lower prices.

Fractional shares themselves are not new. They have long resulted from stock splits and other corporate actions and from DRIPS, or reinvestment plans. And, of course, mutual funds have long dealt in fractional shares.

Fairly recently, brokerage firms started selling fractional shares online, including Acorn, Betterment, M-1 Finance, Public, Schwab, Robinhood, Stash, Folio Investing, Montif, Stockpile, etc. They all have their good and bad points - the key is finding the one that best fits your young investor’s needs.

Fractional = Affordable

Buying fractional shares helps build a diversified portfolio that was previously unaffordable for many. For example, if a stock trades for $500 per share, you’d need at least $500 to buy a single share. If you wanted to buy more than one share of that stock, you’d have to purchase in increments of $500 ($1,000 for two shares, $1,500 for three shares, etc.). Not so with fractional shares. This type of buying allows a “cash-limited” investor to buy the amount of stock she or he can afford, whether it’s $5, $50, or $500.

As most tech-savvy youngsters know, today’s most popular stocks are also some of the most costly to buy. Building that necessary diversified portfolio consisting of a few shares of each would require… gasp… thousands of dollars in upfront money. Using the fractional shares approach, you can allocate a relatively small portion of your cash to each company whose shares you want to buy. If that’s 10%, you could invest $50 in 10… yep… 10 different companies, regardless of their share price.

Fractional = Diversified

Buying fractional shares allows you to build a more diversified portfolio than if you invest all of your money in a single company.

To explain further, let’s review some investing fundamentals. There are three general asset classes within a typical investment portfolio:

* Stocks (also called equities) which represent tiny bits of ownership in companies and which offers the highest – but likely more volatile – yields.

* Bonds (or fixed income) which pay interest to investors who lend money to a company or a government. Bonds generally have an inverse relationship with stocks – often, when stock prices increase, bond prices decrease.

* Cash (or cash equivalents) is the money in your savings account or pocket. Cash provides the least risk and, accordingly, the lowest return. In fact, it often loses value due to Izzy the Inflation Monster. And there are other asset classes, including real estate (property), commodities (natural resources, precious metals), etc., that can provide additional diversification.

It's important to build a diversified portfolio through asset allocation, which is achieved by spreading your investment dollars across a broad range of assets to reduce investment risk. In other words, it's important to invest your money in a mix of the above asset classes (stocks, bond, cash).

Although I’m a proponent of mutual fund investing for young investors because of its built-in diversification, I think there are more effective avenues to learn the fundamentals of saving and investing for youngsters with little or no investment skills and little money - such as fractional investing.

In Sum

The primary reason fractional investing is so beneficial for those with limited cash is diversification. Diversification is the simplest way to boost an investor’s return and reduce risk. And by pursuing a fractional shares approach, a diversified portfolio can actually be simple to achieve for new investors with limited resources.

Of course, it all begins with saving, so start hoarding a small percentage of that allowance and those birthday and Christmas gifts… and do some research on the purchase of fractional shares.

For more information on brokerages that sell fractional shares, read this.

Vacation Properties May be an Investment Worth Avoiding
March 25, 2021

Vacation homes bring joy to many people, and if your family is one that dreams of owning place for weekend getaways and spur-of-the-moment holidays, I strongly recommend that you familiarize yourself with the costs associated with such a luxury. In this week's Q&A, I give food for thought based on my personal experience with owning a vacation home. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion. WATCH THE VIDEO

Q: Our family retirement portfolio is in great shape and we are considering the purchase of a nice vacation property as a future gathering spot for the family. Should we take the plunge?

My Two Cents:

As you embark on your vacation home consideration journey, the primary consideration is to familiarize yourself with the high cost of such a luxury.

Whether you’re considering a seashore, lakefront, or mountain getaway, remember that these homes – by definition, mostly used on a seasonal basis – cost you year-round. Yes, it’s nice to have a comfortable second home that’s readily available for family or extended family and close friends to use, but that convenience comes with a hefty price tag. I would simply ask that you perform an exhaustive due diligence on the true cost of a play-cation villa. Hiring an expert might be worth the cost. Or get some input from family or friends who own or have owned a second home. And keep in mind that there is an abundance of vacation properties available for rent in most resort areas!

If a cash purchase is unaffordable, be prepared to make a larger down payment, pay more interest, and comply with stricter requirements than for a mortgage on your primary residence. And that’s just the beginning.  

Remember that disclosure form you received prior to closing on your first home? The one that laid out the mortgage terms, loan fees, closing costs, etc.? Shortly thereafter came the series of sticker shocks when those additional costs of home ownership surfaced: homeowners insurance, homeowner association fees, property taxes, new furniture and curtain expenditures, landscaping installation and yard maintenance, and years later, a new roof, HVAC repair, etc. I suspect I’ve overlooked a few hundred other expenditures.

Now adjust all of those aforementioned numbers for inflation by a multiple of two or so. And if you’re looking at a seashore property… one subject to an occasional hurricane breeze… add wind and flood insurance to your second homeowners’ insurance policy (that’s right, three insurance policies on a house instead of one); the cost of sturdy, flying objects-proof exterior blinds; and the corrosive effect of saltwater on exterior paint, HVAC systems, and other metal fixtures exposed to salt-laden air. And don’t forget the initial landscaping and lawn irrigation system outlays, and those frequent indoor and outdoor maintenance expenses, which can be an even greater nuisance factor than back at the old homestead.

Since a second home is frequently vacant (unless you rent it out), security, overseer, and occasional maid services can be hefty cost factors. Some vacation retreats come with expensive built-in country club amenities regardless of your social or golf proclivities. Whoops, I forgot to mention a second complete set media entertainment devices, internet, and utility and garbage collection bills. Who wants a second home that’s missing life's conveniences?

And who do you suppose is going to do all of the odds and ends repair work on the “honey-do” list? Probably the same guy that repairs things back home or local handyman who charges double on weekends and holidays.

Yes, I know you’re foregoing the “opportunity” to sell that second home at a huuuge profit down the road, but when you do sell it, be sure and deduct the true carrying cost of owning versus renting during those many… yes, they are enjoyable… years of ownership.

I’m not suggesting that you avoid buying a vacation home. I’m merely suggesting that you look at the numbers – and perhaps avoid the multiple headaches of second home ownership, including worrying about those stinking hurricanes forming off the African coast a gillion miles away.

As Sinatra once warbled, “Regrets, I’ve had a few, but then again, too few to mention”.

ETFs Vs. Mutual Funds: Which is Better?
March 18, 2021

Both mutual funds and exchange-traded funds (ETFs) consist of many different assets and are commonly employed to help investors diversify their portfolios. But there are key differences in how they are managed.

Which is What?

An ETF is...

Let's use the Investopedia definition: An exchange traded fund (ETF) is a type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same as a regular stock. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies.

An ETF is called an exchange traded fund since it's traded on an exchange just like stocks. The price of an ETF’s shares will change throughout the trading day as the shares are bought and sold on the market.

There are three kinds of ETFs: exchange-traded open-end index mutual funds, unit investment trusts, and grantor trusts.

A Mutual Fund Is...

Let's use the Yahoo Finance definition: The word “mutual” used in the term “mutual fund” refers to the structure of the fund rather than the investment strategy that the fund’s owners pursue. This kind of fund combines the funds of investors who mutually pool their monies to buy and sell securities. Investing in a mutual fund is not trading shares of specific companies held by the mutual fund; it is trading shares of the mutual fund company itself. Investors buy and sell their stakes in mutual funds at a price set at the end of a trading session; their value does not fluctuate throughout the trading session.

Mutual funds can be open-ended - where trading is between investors and the fund and where the number of shares available has no limit, or closed-end - where the fund issues a specific number of shares regardless of demand.

Buying & Selling

Buying or selling ETFs is an easy transaction at one price… a single deal away from an open or close position in the market. Mutual funds require calling customer service, completing paperwork, and then waiting for the transaction to occur. Additionally, ETFs tend to be more cost-effective and more liquid when compared to mutual funds.


Taxation is a major advantage of ETFs over ordinary mutual funds. ETFs accrue and incur capital gains taxes only when they are sold. Mutual funds incur capital gains taxes whenever the shares are traded within the lifecycle of the investment.

Choosing an ETF can reduce the tax bill on long term investments.


Mutual funds, except for index funds, are managed by a fund manager who makes decisions about the allocation of assets within the fund. Mutual funds often have higher fees and higher expense ratios than ETFs, which in part reflects the costs of active management.

ETFs tend to be more cost-effective and more liquid when compared to mutual funds.


Both mutual funds and ETFs offer diversified portfolios, but depending on your financial objectives, appetite for risk, and timeframe, the difference is clear for people who prefer the quick liquidity of ETFs vs the long term investment features of mutual funds.

In Sum

In summary, ETFs appear to be the more popular option, offering benefits like low commissions, tax advantages, and easy tradability.

A judicious mix might be best, but in my mind, there is no clear answer to which is superior. As usual, it depends…

#TradingSpaces: Has Robinhood Lost its Luster?
March 11, 2021

In this week's #TradingSpaces I opine on one of the best known - and perhaps, infamous - online trading platforms. Robinhood has attracted millions of new investors, but suffered a major hiccup during the recent GameStop trading battle. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion. VIEW THE VIDEO

Q: Is now a good time to invest with Robinhood after the Gamestop saga?

My Two Cents:

Robinhood offers free trading to 13 million small investors. It makes its money by routing orders to market makers including Citadel Securities. Critics contend that its business model has an inherent conflict because Robinhood generates revenue by selling customers' stock orders to larger trading firms.

Robinhood’s CEO, Tenev, contends that the practice of routing orders allows companies like Robinhood to offer commission-free trading to small investors (the company receives more than 50% of its income from such transactions – its biggest source of income). "We simply play by the rules. Payment for order flow has been approved by the SEC. It is customary practice. I do believe it's been an important force for innovation in the industry."

GameStop Kerfuffle

After suffering six or so years of stock price declines as sales of video games increasingly moved online, GameStop attracted the attention of the Wall Street buzzards, more commonly know as the short sellers - investors who borrow shares and immediately sell them anticipating a price decline. Whether or not a decline happens, they have a legal obligation to buy back shares (regardless of price) to replace those borrowed and hopefully pocket a positive price difference. Fact is, GameStop became one of the most “shorted” stocks on Wall Street. Then came the 2020 rebound.

The stock rose sharply, particularly in early January 2021, after a co-founder of Chewy joined GameStop’s board hoping to transform the company by focusing more on digital sales and less on its struggling brick-and-mortar outlets. Though alarmed by the sudden price increase, short sellers remained pessimistic that GameStop's stock could retain its stock price gains. After all, they say, it’s just a place to buy a video game.

But then, a blood-letting broke out involving countless small investors, many of whom were neophyte traders making a bold… and surprisingly successful… stand against a cohort of savvy hedge-funders. Shares of GameStop spiked dramatically for fundamentally questionable reasons. Occupancy of the high ground offered increasing validation to this cohort of small investors, encouraging others via Reddit… many for the first time… to buy the stock through brokers on free trading apps, such as Robinhood.

Faced with what Robinhood insisted was a need to raise more capital to meet clearinghouse requirements, the company halted trading in GameStop and other stocks. This sparked a backlash among customers, questions from lawmakers and a number of lawsuits. Tenev denies that the company was pressured by hedge funds to halt trading in GameStop… that the trading halt was due to his company's need to raise more capital per clearinghouse requirements. Robinhood raised $3.4 billion from investors over four days in order to meet increased capital requirements.

Take It or Leave It?

I personally see no reason to stop investing with Robinhood because of this widely publicized incident, but I’m inclined to parrot Berkshire Hathaway’s vice chairman, Charlie Munger who, when asked about Robinhood’s influence on young traders, said, “I hate this luring of people into engaging in speculative orgies. Robinhood may call it investing, but that’s all bulls—t.”

Perhaps Charlie and I think the same, but for different reasons. I’m a buy-and-hold guy, so I naturally think of day trading as a bulls—t approach to investing.

In other words, I would use Robinhood for its free trading features, but practice PDQ principles. Buy quality, diversify your holdings and exercise patience.

#TradingSpaces: Is Worthy Bonds Worth Checking Out?
March 4, 2021

I've launched a new series - #TradingSpaces - in which I share my opinions on various online trading platforms. My goal is to dig into the multitude of investment tools available to investors these days. In this week's Q&A, I give my "two cents" on Worthy Bonds - a no-fee, online seller of bonds that also lends money to small businesses. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion. VIEW THE VIDEO

Q: Do you recommend investing spare change in Worthy Bonds, paying a fixed rate of return of 5%? Can you withdraw your money at any time? Other than being risky, is this investment free of fees?


Bonds represent a series of fixed interest payments over the life of the bond and then a return of principal to the investor at maturity. To an investor, bonds tend to be relatively less risky than stocks. The upside gain for bonds is fixed, whereas the upside of stocks is limited only by the profitability of the company. On the downside, an investor can lose 100% of his investment with both stocks and bonds…but with bonds, an investor might recover some value from the sale of a failed company’s residual assets.

My Two Cents:

Worthy Financial sells bonds (at $10 a pop) that pay investors a flat 5% interest (that’s right, flat…not compound interest) on the amount invested, and then loans the money to small businesses. Unlike bank savings accounts, Worthy Bonds aren’t FDIC-insured; thus, the investor’s total investment capital is at risk. The bonds have a three-year maturity, but they can be cashed out at any time, including interest (much like a savings account). By the way, interest income can be reinvested, which Worthy classifies as compounding…but it isn’t compounding in the true sense of the word.


Investors pay no fees to Worthy. So how does Worthy make money if it doesn't charge any fees? While Worthy pays 5% interest to investors, it charges more on its loans to businesses and makes money on the spread.

Worthy has a cool feature that allows you to build savings by rounding up purchase you make in your daily life. To start, download the free iPhone or Android app, create an account, and then link your debit or credit card to your account. As you spend, the app will round up each purchase to the nearest dollar (i.e., If you buy lunch at a fast food restaurant for $7.80, Worthy rounds the purchase up to the nearest whole dollar, and applies the 20 cents to your Worthy account). Once your spare change adds up to $10, Worthy will purchase a $10, 5% interest-bearing Worthy Bond. Interest begins accruing within a couple of days of your purchase.


Although bonds are traditionally less risky than stock, proceeds from Worthy Bonds are used to make loans to small businesses, an exposure that suggests a relatively low return to the investor despite a “higher than normal” risk.

And, although there are no fees paid to Worthy, the bonds are both unrated and uninsured by the FDIC or other insurance agency. This unrated feature creates additional risk even though the bonds are presumably fully asset-backed by borrowers’ inventories. According to Worthy, business inventory can be sold to cover defaults, but if a business has no inventory to sell, well…? It isn't clear what really happens if a business defaults on its loan or what steps Worthy takes to recapture the loan amount. It’s also unclear what happens to investors' principal in the event of a loan default. Presumably, Worthy Peer Capital keeps a reserve fund to cover any loan defaults, further reducing your risk, but is the reserve fund large enough to handle a big default? That’s unclear.  

Customer service is average and support appears to be available only for institutional investors or companies seeking financing. In short, with Worthy bonds, you’re on your own in a fairly risky gambit.

In Sum

Worthy offers a good way to develop a savings habit… better yielding certainly than a bank savings account… but more risky due to the absence of FDIC protection and the underlying exposure of loaning money to small businesses. And because of the risk factor, I wouldn’t suggest using it for an emergency fund account.

More information on Worthy is here.

Should a Beginner Investor Speculate on SPACs?
February 25, 2021

As you probably know - if you've read one or more of my past blogs - I am not what you would call a daring or speculative investor. Even so, I urge anyone considering a SPAC investment to dig deep before making a commitment. In this week's Q&A, I explain my SPAC suspicions, talk stimulus checks and talk shop with a fellow investor who never plans to retire. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion. VIEW THE VIDEO

Q: Are Special-Purpose Acquisition Companies (SPACs) generally considered good investments for beginners?

A: Not in this old conservative’s mind.

But first, let’s define the term Special-Purpose Acquisition Company (SPAC), also known as a blank check company. It is an empty shell that raises money for the sole purpose of looking for a target to merge with and take public. SPACs have a set period, usually two years, to search for an acquisition. They’re not new (what is?), but suddenly they are very popular vehicles for taking shortcuts to the public markets…cheaper, faster alternatives to an initial public offering (IPO). They often utilize public figures (influencers) to attract attention to their fundraising efforts, which is typically a red flag to me. But the SEC has tightened regulations and procedures for SPAC activities, and they now have to register with the SEC.  

SPACs generally have to place investor funds in a trust or escrow account until a target company is publicly announced. If investors don't like the deal, they have an opportunity to recover their funds. SPAC investors…  and often the sponsors… don't know how their money will be used, making a SPAC deal difficult on the front end to evaluate. And there is that long gap, up to two years, before a SPAC actually buys a target company and starts operations. Dollars sitting idle for that long makes this old investor very nervous. Recent studies show that the average SPAC underperformed both the S&P 500 and the Russell 2000 indexes during the 3-, 6-, and 12-month periods after merger completions. By the way, getting into a SPAC is not as simple as buying regular equities. It helps if an investor has an existing relationship with a SPAC sponsor. In short, hedge funds, mutual funds, and the deep-pocket institutional boys usually find out about new SPACs first.

In my opinion, SPACs are not for long-in-the-tooth investors like me. Money can be tied up for a year or two, uninvested. Small investors are usually kept in the dark about ultimate funds disposition… not so much for sponsors and institutional investors. And, of course, there are no guarantees. SPACs are speculative investments because they tend to acquire startups or struggling companies… by nature, high risk. The allure is that SPACs offer smaller investors a way to participate in the IPO game – not necessarily up front, but not too far behind.

Lazy investors like me shy away from SPACs and allow the Amazing Power of Compounding to do the heavy lifting.

Q: Will some people be getting $1,400 stimulus checks in the mail? I’m reading about the new $1.9 trillion stimulus bill and getting mixed messages on that aspect.

A: My most recent read is that the latest stimulus check will be $1,400. When added to the late December/early January’s $600 stimulus check the combined would total $2,000.

By the way, the latest stimulus package is not yet law – but parts of it seem destined to pass a Democrat-controlled Congress. It’s still up in the air who might receive those checks, individuals with incomes up to $50,000… or $75,000, and folks filing jointly with incomes up to $100,000… or $150,000. Right now, the rumor mill favors the high end of the ranges. Incidentally, no individual earning more than $100,000 or couple earning more than $200,000 would receive a relief check. Previously, only children listed as dependents on a federal tax return could receive a payment. A new tweak to the law says all adult dependents in the household (such as college students) can be counted and receive money. This foregoing information is House bill info. The Senate could very well lower the income thresholds to lower the bill’s final cost.

Stay tuned.

Q: What percent of your portfolio annually should you anticipate withdrawing for daily expenses in retirement? More importantly, what are the percentages of your asset allocation. Stocks, bonds, cash?

A: I recommend 3-4% annual portfolio withdrawal, adjusted for inflation, for day-to-day expense coverage. The top end of that range might be more appropriate for “total” withdrawals during the early retirement years when folks are more inclined to travel, tapering off during the middle golden years, and increasing in the later years due to the probability of increased medical issues. But those “top of the range” numbers are often financed by tapping what I call the “capital buckets”; whereas day-to-day expenses are usually financed with cash flow assets (Social Security, annuities, pensions, etc.).

Day-to-day expense withdrawals in retirement tend to mimic those of pre-retirement lifestyles. But don’t overdo this 4% rule. I’ve read where only about 16% of retirees exhaust their assets within a given timeframe. Many end life leaving small fortunes to their kids.  Michael Kitces, noted financial planner, hypothesized that “The 4% retirement rule has quintupled wealth more often than depleting principal after 30 years.” In short, many retirees spend their lives fretting about money, and then let their kids enjoy spending it.

As to asset allocation, my approach differs from that of many folks for two reasons: I’m overly cautious about inflation (we can’t print bushels of money forever and not finally pay the price), and I refuse to accept near-zero returns on a majority of my long-term investments. Thus, my allocation (80:20) is virtually the reciprocal of the general rule of thumb (20:80) for my age. Risky, yes, but I’m a buy-and-hold guy… and even if I run out of time, I expect my heirs to also be buy-and-hold folks.

Q: Hypothetically, what investing strategy should somebody pursue that doesn’t plan on retiring? What if you plan to retire in your 90s…  or never?

A: Interesting question.

I’m going to assume health is not an issue, but for safety’s sake, make sure you have Medicare Parts A, B & D coverage plus one of the better “Supplemental Health Care Plans” (I personally prefer a supplemental over the various Advantage Plans that can be full of surprises). A good dental and eyewear plan might be in order, too.

With this in mind, I would worry more about inflation and less about a periodic balancing toward more bonds due to aging. Why? Many folks who plan NOT to retire probably own profitable ongoing businesses or possess fatter-than-average portfolios of investments, which produce reliable income streams. If this assumption is true, your concern might be more about keeping up with inflation (dollar power erosion) than outliving your savings. Not to say some rebalancing shouldn’t be done, but to a lesser degree than someone retiring on a slowly declining portfolio of savings.

My own experience suggests continuing investing more like in your 40s and 50s, but somewhere along the way (60s and 70s) start adding in a larger (but not excessive) percentage of Target Dates or the like as a safety precaution against cognitive decline.  

Exercise Patience You Will, Young Investor
February 11, 2021

I was very pleased to get a question from a young, fledgling investor who is ready to storm the market with a year's worth of income! Count me impressed. In this week's Q&A, I talk PDQ principles and enter a one-sided discussion about what percentage of pre-retirement income you can expect to spend annually in your Golden Years. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion. WATCH VIDEO

Q: How does a young person with a year’s worth of income begin investing?

A: I assume you mean you have the equivalent of a year’s worth of income saved and available for investing. If so, that means you have accomplished the first important step to becoming a wise investor… you’ve become a saver.

The next step is to develop an investment program you plan to follow for years to come. I like the “dollar-cost-averaging” approach; the buy and hold approach; the mutual fund versus individual stocks approach… in short, my PDQ Principles approach to investing. Buy Quality products, Diversify and be Patient. The easist way to do this is to buy good quality mutual funds, and to build your portfolio around an index fund (e.g. a total stock market index fund, S&P 500, etc.). And don’t go “whole hog” into the market. Consider instead buying a given dollar amount of quality assets on a certain date each period (week, month, quarter, etc.). Having established this approach, remain faithful to your investment portfolio. In short, stay put. Don’t join the thundering herd when the market goes up or down, particularly down in the instance of a major correction. Corrections are part of an investor’s life.

If you have built a quality, highly diversified portfolio, don’t bail out. Such a choice often results in the creation of a needless tax event, possibly a loss, and later, an opportunity cost of not getting back in the market on a timely basis when there is a recovery. To benefit from the stock market you have to be there, and you have to stay there to optimize the Amazing Power of Compounding. Every sell you make disrupts compounding. Don’t forget that.    

Q: What are the advantages and disadvantages of rolling money from my previous traditional employer 401(k) plan to a new Roth brokerage Individual Retirement Account (IRA)? Secondly, when will I be paying the taxes due to conversion to Roth?

A: The primary advantage of a Roth is in retirement when an individual begins withdrawing money… tax-free. But this raises a thorny issue… will you be in a higher or lower tax bracket in retirement? If you think you'll be in a higher tax bracket, then the Roth is the way to go. So basically, a crystal ball would be helpful in making this decision. I absolutely favor a Roth IRA, but as with all things in life, it depends.

Age Matters: At age 72, one can no longer contribute to… and must make minimum withdrawals (RMDs) from... a traditional IRA. Why? Uncle Sam wants his cut. A Roth IRA has no age 72 restrictions as to contributions or withdrawals. Uncle Sam already has his piece of that pie. And as long as sufficient “earned income” is available, anyone can contribute to either type of IRA (no dice if it’s income from selling property, stock, etc.). Also, Traditional IRAs (for workers without 401(k)s) have no income restrictions. They’re open to all. Roth IRAs, however, have upper-income limits. Currently, if individuals makes more than $140,000 a year, no Roth IRA for them. And if couples (filing a joint tax return) earn more than $208,000 a year, no Roth IRA for them. The government frequently increases these upper limits from year-to-year. The current annual contribution limit for both Traditional and Roth IRAs is $6,000 ($7,000 after age 50).

Tax Considerations: The total taxable conversion amount depends on whether the underlying contributions to the IRA were deductible. Deductible contributions and subsequent gains are taxed at full current value. In short, if only deductible contributions were made to the IRA, taxes will be due on the full amount. Further, the tax due on a conversion will be collected by Uncle Sam along with the rest of income taxes due on the return filed in the year of the conversion. And yes, you may be required to make estimated tax payments in the year of the conversion, before you do your return. Logic tells me those taxes come due and payable during the quarter the conversion occurs. Again, converting to a Roth can have a significant impact on current year’s taxes since previous untaxed contributions and subsequent earnings within the IRA are considered to be taxable income.

Administrative Advantage: Direct the financial institution holding your 401(k) assets to transfer the funds directly to the trustee of your Roth IRA. This avoids the possibility of violating the 60-day rule regarding transfers from one account to another, which could entail tax penalties.

Q: I'm nervous about the money I have in the market, which hasn't really grown much, and about an annuity. I've run into a tough time and debt is rising exponentially. Please advise.

A: I usually suggest to people that they buy and hold. However, in today’s healthy market, if your portfolio hasn’t grown much, you might want to take inventory of its content. Perhaps you’re too bond heavy. As to the annuity, you may be locked into a long-term choice… and most likely without inflation adjustments. It’s hard to comment on your exponentially rising debt without knowing why, except to say quit borrowing. As to your nervousness about the market, it seems a bit toppy, but you have to be there to reap its benefits. Take a hard look at the quality and diversity of your current holdings. Changes may be in order… more so than abandoning the market.

Q: Is 80% of my pre-retirement annual income a good number for a comfortable retirement income?

A: Eighty percent of pre-retirement income may be a place to start the planning process, but factors such as potential years to retirement, anticipated lifestyle including enhanced travel plans and health expectations must all be considered to help estimate future retirement expenses.

Most pre-retirees have probably read about the 4% rule – the concept that if you spend 4% of your retirement portfolio the first year of retirement, and then adjust spending upward each year to account for Izzy the Inflation Monster, your portfolio will likely accommodate that level of spending through a 30-year retirement. A shortcoming of this concept is that folks dedicated to the idea often consider it a “no-no” to spend more than 4% (inflation-adjusted) regardless of changing circumstances. Spending more than 4% per annum isn’t necessarily risky. As usual, it depends… for example, depending on your age, spending more than 4% might make perfect sense, because you don’t need your portfolio to last 30 years. Or perhaps you desire to spend at a lower rate, hoping to leave a significant portion of your estate to heirs.

As to what percentage of pre-retirement income is a good number for a comfortable retirement income, it’s largely a function of pre-retirement income and the amount of money saved for retirement. Based on a number of studies I’ve read, in the early years of retirement, it’s not uncommon for folks to spend in retirement as much as they had spent while still working, but as they age, spending levels off. Logically, retirement spending on food, entertainment, and transportation remains relatively stable (except, perhaps, for travel), while spending on housing (due to downsizing, mortgage payoff, etc.) tends to decrease… offset somewhat by spending on healthcare, which tends to increase with age. One might conclude from this statement that spending in retirement might remain fairly steady.

As to the significance of pre-retirement income, a person making $50,000 a year might wish to adjust the 80% factor of their pre-retirement income to 100% during those early years of retirement as opposed to someone making $200,000, who might only need 50-60% of their pre-retirement income to fund a retirement lifestyle, particularly in the waning years of retirement.

In summary, consider using 80% of pre-retirement income as a starting point, plot the range somewhere 50% and 80%, and then make those necessary adjustments for travel, lifestyle, medical considerations, etc. to get to a final number… and then expect to adjust it to accommodate life’s many surprises.

The Great GameStop Stock Heist
February 4, 2021

The younger investors among us made a loud and strong statement with GameStop stock in the past month. I am impressed by their resolve, but can't resist the temptation to view it as a investing lesson. In this week's Q&A, I expound on the great GameStop stock heist. I also throw out my opinion on 401(k)s and IRAs per usual. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion. WATCH THE VIDEO

Q: Can you explain rise and fall of GameStop's stock recently? I thought that their business model was disappearing under their feet.

A: Because of a still ongoing, widely publicized kerfuffle, lost in the momentary chaos is the fact that GameStop is a business, not just a bunch of shares with lives of their own.

Fact is, the company has suffered six or so years of stock price declines as sales of video games increasingly moved online - the company's current business model is “disappearing under their feet”. This conundrum attracted the attention of the Wall Street buzzards, more commonly know as the short sellers - investors who borrow shares and immediately sell them anticipating a price decline. Whether or not a decline happens, they have a legal obligation to buy back shares (regardless of price) to replace those borrowed and hopefully pocket a positive price difference. Fact is, GameStop became one of the most “shorted” stocks on Wall Street. Then came the 2020 rebound.

The stock rose sharply, particularly in early January 2021, after a co-founder of Chewy joined GameStop’s board hoping to transform the company by focusing more on digital sales and less on its struggling brick-and-mortar outlets. Though alarmed by the sudden price increase, short sellers remained pessimistic that GameStop's stock could retain its stock price gains. After all, they say, it’s just a place to buy a video game.

But then, a blood-letting broke out involving countless small investors, many of whom were neophyte traders making a bold… and surprisingly successful… stand against a cohort of savvy hedge-funders. Shares of GameStop spiked dramatically for fundamentally questionable reasons. Occupancy of the high ground offered increasing validation to this cohort of small investors, encouraging others via Reddit… many for the first time… to buy the stock through brokers on free-trading apps. Question is, will GameStop’s stock eventually tumble? Yes. Are GameStop investors, specifically, and investors in general, taking excessive risks? Yes. Is a broad-based stock market bubble developing? Not necessarily. The Fed downplays its rather conspicuous role (of continuing low interest rates) and points to investors' expectations for widespread COVID-19 vaccinations and still another generous stimulus package out of Washington as important drivers of record stock prices. And, by and large, marketplace fundamentals appear strong despite the pandemic.

The little guys (and some hedge fund boys) drew first blood from the short sellers, but it could be a fleeting victory. They’re backing a weak horse. Many are almost certain to lose their big paper gains. Because I believe in the old saw - pigs get fat and hogs get slaughtered – if I still had a gain in GameStop, I’d take it and run. A weak, overpriced stock will eventually reach its apex, and then drop like a rock. Signs indicate that’s already happening. I hope I’m wrong but paying off a student loan or credit card balance just might be the wise thing to do with those remaining chips.

And, despite a pending SEC investigation, encouraging “volunteers” to bid up the value of a stock to make a point doesn’t seem like criminal activity to me. Just saying.

Q: I was laid off recently and my pension plan is eligible for a lump sum withdrawal. If I don't take the lump sum, it will earn a minimum of 3.8% per year. Should I take a lump sum and pay taxes due or let it be?

A: Hmmmmm. As to taking the lump sum or not, if you do, you should seriously consider rolling it into an eligible retirement plan – to avoid immediate taxation – and investing the entire proceeds in a low-cost, highly diversified fund. Note: Since 2000, Vanguard’s Total Stock Market Index Fund has earned an average annual yield of better than 7.75%, and their Target Retirement 2050 has averaged 8% since inception. Investment options abound that seem equal to or better than the 3.8% you mentioned.

If your company allowed you to contribute after-tax dollars to the plan, then no taxes would be due on the portion of your lump sum benefits that represents a return of your initial investment. However, you can defer paying taxes on the lump sum distribution by requesting your old company’s plan administrator to directly roll the money (within 60 days) into an IRA or other eligible retirement plan. A direct transfer exempts you from having to pay the 20% federal withholding on an indirect transfer. By transferring the lump sum amount to an eligible retirement plan, you effectively defer paying taxes on it until you start making withdrawals in retirement or at age 72.

Q: I have a 401(k) and some liquid savings, but most of my wealth is equity in my home. I am about to sell my house, and will have $100K to invest. My plan is to open a Roth IRA, contribute the max and invest the $100k elsewhere. What are your recommendations?

A: Since you have a 401(k), I assume you are working and that you have “earned income” with which to make contributions to a Roth retirement account. Contributing an annual maximum to a Roth IRA makes sense, but does not quickly achieve your second objective of putting money to work ASAP.

Since you seem to be somewhat unprepared for retirement at this point, tying up funds in a new home (as opposed to renting) might be ill-advised, depending on your age. I would suggest you consider a low-cost, highly diversified index or Target Retirement Fund as a place to park your supplemental $100k during the time you draw it down to fund your Roth. Hopefully, you will have a nice Social Security check as supplemental income to the savings proceeds mentioned.    

Guilty as Charged: How Do You Know When Enough is Enough?
January 28, 2021

Many of us started with nothing (except that egg money, Joe) but did have the good sense to pay attention to parental and other financial advice, particularly about “never” dipping into those retirement savings accounts… let’s call ‘em our capital preservation reserves. In fact, we were told to set aside emergency (Rainy Day) funds specifically to avoid invading our retirement funds prematurely. In short, hoard those long-term, revenue-producing capital accounts at all cost because that’s what makes the Amazing Power of Compounding work so efficiently on our behalf across a 40-year career. The money steadily saved and the income it produces in those capital accounts will grow like topsy if left alone.

Relentless Habits

For some of us, this capital preservation habit becomes so ingrained in our financial toolbox that we never relent… even after it has served its worthy purpose; even after we enter that phase of life the habit prepared us for – those golden years. In short, at the very time we should be enjoying all of the fruits of our labor we just can’t seem to bring ourselves to do it.

Hands off those pots of capital, our subconscious screams! Thus, we find ourselves spending only the income derived from these carefully accumulated reserves of capital.

Hard Habit to Break

It’s an exceedingly difficult habit to break. The government has been very quick to slap our hands and penalize us 10% if we tap into our 401(k) or IRA retirement funds prematurely. And Uncle Sam also warns us not to request those hard-earned Social Security checks too quickly (often wise advice but not always).

We hear all of the horror stories about how so very few people enter retirement with sufficient savings. These rumors are frightening and take a toll on us. We fret about outliving our resources as we watch our capital reserves grow in size. Fair enough, but how much is enough?

Economics 101

I’m reminded of those Economics 101 principles learned long ago, but one in particular stands out as I write this blog: the diminishing marginal utility of income and wealth... that each additional dollar we earn provides less satisfaction and happiness than the dollar before… that going from zero to $500,000 in assets provides a much bigger boost to our happiness and well-being than going from $1 million to $2 million.

Might we safely assume that the same diminishing marginal utility principle applies to security as well as happiness? Where do we draw the line about the degree of security we need to feel comfortable in retirement: $500,000; $1 million; $2 million, etc.?

Guilty as Charged

In summary, my point is simply this. Optimize that margin of financial security that gives you peace of mind. But don’t overdo it; don’t require so much financial security that you fail to enjoy the well-earned fruits of your labor, keeping in mind, of course, those important factors like diversification and Izzy the Inflation Monster.

… and yes, I’m guilty as charged.  

Don't Wait Until It's Too Late to Decumulate
January 21, 2021

I focus a lot on saving, investing and saving some more for retirement. This week I do a 180 and talk about the opposite: What to do when you have reached retirement and need to tap into your retirement to pay your living expenses. I also throw out my opinion on investing in mutual funds vs. individual stocks. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion. WATCH THE VIDEO

Q: It's finally time for me to retire and people tell me I need a "decumulation strategy." What is that and how do I do it?

A: Let’s first define the term, decumulation. Simply, it’s the antithesis of one’s wealth accumulation phase; it is a thoughtful plan/strategy on how best to draw down (spend) accumulated wealth/investments during retirement.  

Often folks facing retirement give too little thought to the shift from wealth accumulation to wealth decumulation, which involves an important shift in investment strategy as investors transition to retirement. A necessary starting point includes the development of a retirement budget to better assess which assets might first be exhausted and which should remain invested. This, of course, involves an analysis of how your assets are currently invested and how you might best withdraw funds from those various sources. Don’t feel alone in this “chasing your tail” exercise.

How you decide to decumulate your assets is the most important decision you’ll make as retirement approaches. Specifically, when deciding how to decumulate your assets in retirement, consider taking these three important steps:

  1. Do a risk analysis of your investments. By definition, so-called “safe” investments are less risky, but they offer lower returns. On the other hand, riskier investments should produce higher returns, but offer less protection for your capital. With this in mind, you’ll want to consider what assets you should access in the early years of retirement and what should remain untouched for the longer haul.
  2. Based on your risk analysis, decide how you should you make withdrawals from your various accounts. One common approach is systematic where you develop a set dollar or percentage amount of withdrawals from your portfolio on a monthly or annual basis. If you have a non-Roth 401(k) or IRA , Uncle Sam – to get his piece of the action – will impose a methodology called required minimum distributions (RMDs) on you based on a table of life expectancies… whether you need the money or not. RMDs force you to consider which portfolio investments to liquidate in order to fund Uncle Sam’s requirements. This involves a bit of speculation on your part as to how changing market conditions might impact your month-to-month liquidation plan.
  3. Delineate your guaranteed income sources and liquid assets. An optimal retirement portfolio includes both. If Social Security and existing pension benefits are insufficient to cover recurring basic expenses, you might consider covering the gap by converting some assets into a steady retirement paycheck that continues for life (e.g., an income annuity). This involves a tradeoff between near-term liquidity and the certainty of income you won’t outlive.

To summarize, a decumulating investment strategy requires a sound strategy involving the sale of certain assets to fund recurring retirement expenses as well as determining which assets to keep for purposes of continuing to grow one’s investment portfolio without exposing it to inordinate risk and volatility. Each individual’s asset base is different, thus requiring different approaches. Expert third-party input is always advised and can be downright helpful.

Q: What are your thoughts about financial planning in advance of becoming a loved one's in-home caregiver/financial guardian?

A: According to the AARP and the National Alliance for Caregiving, the average duration of time spent by caregivers providing care for a parent or parents is 4.5 years. So, planning is paramount whether you’re a caregiver or being cared for. The planning categories can be reduced to four: Income and Budgets, Estate Planning, Taxes, and Remodeling. Let’s start at the top.

Income & Budgets: There are two components to this finance issue, which demands knowledge of the state of financial affairs of a parent coming aboard – an often touchy subject but it must be addressed. Is he, she (or they) of modest or comfortable means? If financially comfortable, that implies he/she will be able to contribute to now higher household expenses. If a parent is of modest means, this implies more household expenses due, perhaps, to higher utility and grocery bills, and more trips to primary care physicians and specialists resulting in unplanned prescription and uncovered doctor bills. In more extreme cases, a working caregiver might have to reduce hours spent on the job to provide care for an invalid parent. Handled poorly, this can impact the budgets of all involved. Uncovering your parent’s financial condition up front helps plan for and avoid future financial surprises.

Estate Planning: It's vital to have an updated version of your parent’s last will and testament (and related documents). It’s also a good time to discuss other financial and guardianship matters… a time when, inevitably, a caregiver will need to assume financial and other responsibilities previously handled by the parent. Because rumors circulate about adult children taking advantage of elderly parents, a clear understanding of who will assume what roles and when is particularly important. Even discussions about an ultimate move to a nursing home, if affordable, should be discussed at the appropriate time. Old folks worry about losing control of their finances and future. They need assurances that caregivers have their best interests at heart.

Taxes: Research whether tax deductions or credits are available to you based on the significant contributions you will make to your parent’s care. This can help ease the financial burden on all parties involved. Discussions with a tax expert might be in order. But begin your own research by studying IRS Publication No. 501, “Dependents, Standard Deduction and Filing Information”, and IRS Form 2441, “Child and Dependent Care Expenses”. Always ensure that your parent’s federal tax return is promptly and accurately filed.

Remodeling: Because of the lengthy time period a parent might spend in a caregiver’s home, the stay often leads to remodeling efforts to accommodate the aging process… improved lighting, grab bars in bathrooms, changing handles on doors and faucets, relocating upstairs bedrooms to avoid stairs, door widening to accommodate wheelchairs, and even an additional bedroom or bathroom, or both. Some families even find it necessary to move to a larger home. In any event, this can result in significant unexpected outlays, so be prepared.

Obviously, there can be some major financial and physical issues involved in becoming caretakers of elderly parents… or becoming an elderly parent. And regardless of which position you occupy (probably both at different stages of life) it’s wise to plan ahead.

Q: What is the advantage of buying mutual funds versus individual stocks?

A: The primary advantage is automatic diversification… to varying degrees. For example, buying the S&P Index Fund gives you ownership in 500 of the country’s largest companies, by valuation… the best and the less good. Alternatively, if you should buy Vanguard’s Healthcare Fund you would be highly diversified in that particular sector of the market but not in other sectors.

There are companies that exist to assess the quality of mutual funds, which saves investors the trouble depending on how much they trust the evaluators. Morningstar, for example, rates funds based entirely on the numbers. It assigns one to five stars based on a given fund's past risk-adjusted results, taking into account sales charges the fund levies in calculating performance. The best (in Morningstar’s opinion) receive five stars; the bottom-dwellers receive one star.

A disadvantage of owning mutual funds is that investors have no control over the kinds of dividends to pursue, nor when to sell given stocks. Mutual fund managers make those decisions. With the advent of index funds and ETF’s, management fees approaching zero have become a very enticing feature of unmanaged funds and have helped to reduce the operating cost of managed funds as well.

Stimulus Payments 2.0: About the CRRSA Act of 2021
January 14, 2021

The $900 billion Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (CRRSA Act), signed into law on Dec. 27, 2020, delivered a second round of economic stimulus for individuals, families, and businesses. It also expands many of the provisions already in place under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), including a second direct stimulus payment to individuals who qualify. WATCH THE VIDEO

Stimulus Payments

According to data released by the U.S. Treasury Department, the majority of stimulus payments are already in householders’ bank accounts… up to $600 for eligible individuals, $1,200 for joint taxpayers, and an additional $600 for each dependent child under 17 (e.g., a family with two children could receive $2,400).

This second round of stimulus payments ($164 billion), like the first round, IS NOT TAXABLE... nor is it repayable to the government at some later date. And there’s no action required on your part to receive the stimulus money. The IRS is using the most recent information on file – most likely your 2019 tax return or Social Security address – to get the stimulus payment to you either by direct deposit or by check.

Who is Eligible for How Much?

Expect to receive the full entitlement if your adjusted gross income (AGI) is not more than $75,000 ($150,000 if married filing jointly). AGI is gross income like wages, salaries, or interest minus adjustments for deductions like student loan interest or traditional IRA deductions. Folks receiving Social Security retirement, disability, Railroad Retirement, VA, or SSI income and who are not typically required to file a tax return, will again receive a stimulus payment. The IRS will use the information from Form SSA-1099, Form RRB-1099, or the Veterans Administration to generate the stimulus payment.

As AGI increases over $75,000 ($150,000 if married filing jointly), the stimulus amount ratchets down and will completely phase out at $87,000 for single filers with no qualifying dependents ($174,000 if married filing jointly with no dependents).

By the way, this bill expands stimulus payments to include households with different immigration and citizenship statuses not included in the first round; so, retroactively, some individuals ineligible for the first (CARES ACT) stimulus may receive that payment as a recovery rebate credit when filing a 2020 tax return.

The Unemployed Among Us

Unemployment checks will increase by $300 per week, and benefits will extend to March 14, 2021 (unemployment compensation is taxable, tempered by the fact that tax rates drop as income drops). Also extended is the Pandemic Unemployment Assistance (PUA), which expands unemployment to include those not usually eligible for regular unemployment insurance benefits (i.e., self-employed, freelancers, and side-giggers – a hobby, seasonal, or occasional work – will continue to remain eligible for unemployment benefits). Certain workers with at least $5,000 per year in self-employment income but are disqualified from receiving PUA because they also have an employer, could also be eligible for an additional $100 per week in unemployment benefits.

Earned Income Tax Credit & Child Tax Credit

This important provision will help workers who experienced lower 2020 income – or who received unemployment income in lieu of their regular wages – get bigger tax credits and larger refunds in the coming year. It allows lower income individuals to use their earned income from 2019 to determine their Earned Income Tax Credit and the refundable portion of the Child Tax Credit in 2020, since their lower 2020 income might reduce the amount they are eligible for.

The Earned Income Tax Credit is the federal government’s largest program for working people with low to moderate income. Last tax season, over 25 million eligible tax filers received, on average, an Earned Income Tax Credit of $2,476.

Expanded Paycheck Protection Program

Of utmost importance from an employment perspective, the 2021 Act provides a second round of payments under the Paycheck Protection Program (PPP). Self-employed individuals, small businesses, small 501(c)(6) organizations, restaurants, live venues, and Economic Injury Disaster Loans (EIDL) are again eligible. And businesses that continue to experience severe revenue reductions can apply for a second PPP loan.

Businesses with 300 or fewer workers that have experienced 25% revenue loss in any 2020 quarter and small 501(c )(6) organizations that have 150 employees or fewer are eligible for a Paycheck Protection Program under the COVID-19 Emergency Relief Package. And the 2021 Act broadens the type of business expenses forgiven under the loan to include supplier costs, allows business expenses paid utilizing PPP proceeds to be tax deductible, and simplifies the loan forgiveness process.

Extended Student Loan Forbearance

Importantly, both students and parents carrying federal student loans will receive an additional extension on (both principal and interest) loan payments and will not be required to make any payments until April 1, 2021.

Contractor Paid Leave

Contractors temporarily unable to work due to facility closures and other restrictions could receive reimbursement for paid leave from federal agencies.

Eviction Moratorium & Rental Assistance

The CRRSA Act also extends the moratorium on evictions under the CARES Act, which will protect renters from eviction until January 31, 2021… a big boost for struggling families who will receive assistance for paying past due and future rent payments, as well as utility bills. The stimulus package includes $25 billion in emergency rental assistance and extends the deadline to use relief funds set aside in the CARES Act. This assistance is in addition to the stimulus checks of $600 and a 10-week period of $300 in pandemic-related jobless benefits.

Tax Extenders

The CRRSA Act also includes the permanent passage – in some cases, a multi-year extension – of many additional tax provisions commonly referred to as tax extenders, which provide tax relief and support for families and individuals through various mortgage relief, education, and medical expense relief. For example, participants in Flexible Spending Accounts (FSAs) can carry over unused funds from 2020 to 2021 and 2021 to 2022, assuming company plans opt into the new rules.

New Year, New Opportunity to Plan for the Next Rainy Day
January 7, 2021

A new year ignites my obsession for Rainy Day - or emergency - funds. A couple of this week's Qs touch on this vital topic and my strong recommendation to establish one (if you don't already have one) before even focusing on saving and investing. I also answer a 401(k) Q, per usual. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion. WATCH THE VIDEO

Q: I want to put my Emergency Fund in a safe place - is there anywhere to put the money besides a savings account?

A: As I often preach, you should set aside several months of income in a secure and very liquid account for emergencies. In my opinion, the least risky approach is a bank savings account because deposits have FDIC protection should the bank fail (the standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category). However, the yield on a bank savings account is virtually zero these days.

Another option is a money market account usually associated with a brokerage account with limited SIPC protection, which is not the same as protection for cash at an FDIC-insured bank. SIPC protects cash in a brokerage firm account from the sale of or for the purchase of securities. Investors often use money market accounts to store funds while deciding how to invest their “stored” dollars. These accounts allow investors to write larger checks and offer a more competitive interest rate than do banks. Alternatively, investors can access their non-retirement liquid assets for quick money, but this involves selling such assets into what could be a weak marketplace, increasing the risk of loss. My personal preference is a money market account.

Q: Would you recommend taking out a loan right now and investing the money?

A: The nature of your question suggests to me that you’re new to the investment game, and if that’s the case, my answer is no. You should be saving instead of borrowing. Why? The stock market has reached recent new highs, and there is still a good deal of unresolved chaos with regard to the coronavirus vaccination process and with a new administration coming to power. In short, there is ample uncertainty, which affects uninitiated as well as seasoned investors.

If you are a new investor, now is a good time to develop a routine savings program and to start investing on a ***dollar-cost averaging basis*** but only after you’ve covered your short-term exposure to unexpected events with an emergency or Rainy Day fund. Once you’ve established this emergency fund, start easing into the market keeping in mind the importance of diversification, quality and patience – quality and diversification initially through a broad-based index fund and patience by having the courage of your convictions.

Borrowing money to invest (in whatever) comes later… once you’ve established a good investment strategy and a track record supported by a robust and growing portfolio.

Q: I set up my 401(k) a while ago. Now, I'm being asked to rebalance my portfolio. If it's not broken, why fix it?

A: In my opinion, yes. As you seem to be doing, it’s always wise to diversify your investments… in stocks and/or mutual funds…  in bonds… and in other investments such as REITs or CDs.

When markets make their inevitable “corrections” along the way, you'll be exposed to less risk because of asset allocation, hopefully providing sufficient time to recover before the money is needed. Diversification within an allocation is also important. For example, if an investor has stocks, bonds and money market accounts, but if those stocks are all in one industry, the investor still faces a greater potential for loss.

An easy way to diversify is through mutual funds, particularly index funds. Additional  diversification can be gained through investment in different sized companies… large cap, mid cap and small cap… in growth and value stocks…  and in different industries. For  investors who prefer not to personally involve themselves in the act of rebalancing, they might consider Target-date funds-of-funds, which automatically rebalance (to a heavier allocation of bonds) as retirement approaches.

Again, there is absolutely a benefit to rebalancing, particularly as one grows older. In theory, at least, it attenuates risk during market corrections.

WELCOME 2021! Give the Gift of Education to a Deserving Kid This Year
December 31, 2020

With a new year less than 24 hours away (as I write this), I am happy to welcome 2021 for many obvious reasons but also strangely nostalgic about leaving 2020. It was a year that forced many difficult changes on us, but not all were bad. I hope that 2021 brings you and your family peace, prosperity and a much-needed break from difficulties you may have faced in the past 365 days. I mark the end of the year/beginning of the new year with my recommendations for educational gifting options, practicing patience during perceived threats of market crashes and 401(k) transfer options. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion. WATCH THE VIDEO

Q: This year, I want to gift my young nieces and nephews with $$$ that goes toward their education - whatever form that takes in the future. Should I go with mutual funds, savings bonds, stocks, UTMA, or cash with instructions? Recommendations needed and welcomed!

A: Upfront, let me stress maintaining control of your financial gifts because of the young ages involved. No doubt, your heart is in the right place, but I assume you want a positive outcome for such generosity. It is a great idea to help the older kids establish a Roth IRA. Just remember, contributions to Roth IRAs must be made with “earned income” dollars…yours through gifting or with the recipient’s own earnings. It doesn’t need to be your niece or nephew’s $2,100 that is contributed. As long as he/she has sufficient earned income to justify the $2,100 contribution, there's no reason why you can't gift the contribution to him/her, who can then contribute the money to the Roth IRA In short, you cannot make contributions directly to another person's IRA. Each IRA is linked to one person's Social Security number; thus, only that person can contribute to that account.

The same earned income rules would apply to the next younger kin, but on the chance that they won’t have much, if any, earned income you might set aside portions of your own holdings (e.g., 15% of mutual fund X) as an addendum to your will specifying when and how the recipients would gain access to the changing value of those set-asides. This allows you to retain control of fund investments until specified dates of disbursement are reached… for whatever purpose. I like this increased bit of control over younger, less mature recipients.

Regarding the youngest kids, you might consider 529 education funds (with you as custodian… again, control) because they are still young enough for 529 investments to achieve meaningful gains by the time they reach college age. And if the youngsters decide not to pursue additional education, you can direct the money to other kin seeking higher learning.

Q: The market seems overbought. Should I sell my investments before the COVID-19 causes the economy to crash?

A: Absolutely. And please call me the day before the crash so that I can dump mine, too. My apologies… sometimes I can’t resist being a wise guy. My point is simply this. Not even the Omaha Oracle can time the market. Granted, some folks are luckier than others in that particular guessing game, but the game I play is to “not join the thundering herd”. I stay invested and exercise patience. In fact, I keep investing on a dollar-cost-averaging basis during a correction on the premise that an investor has to be there to enjoy the benefits of investing. True, it’s painful to endure the stress of a downturn, but historically the long-term trend is up.

Q: I’ve decided to move my 401(k) funds from my former employer to my new employer’s company. With 60 days to deposit these funds into my new account, should I wait or deposit the money now?

A: Let’s discuss 401(k) rollover options. Having decided to transfer money from one company’s 401(k) plan to another, an individual has two options: a direct rollover or an indirect rollover.

In a direct rollover, the money is transferred directly to another retirement account, untouched by the owner of the account. No taxes or penalties on the money being transferred are assessed and the transfer is done.

Indirect rollovers (as in your case) are more complicated…and more risky. instead of the money going straight into the new account, the cash goes to the individual. And, yes, the individual has 60 days to deposit the funds into a new retirement plan. But failure to do so will trigger withholding taxes and early withdrawal penalties. My question is why take the chance? Most 401(k)s offer at least one very liquid, very safe, cash equivalent (i.e., money fund) option. Why not park your money there until you decide what to do?

I understand your reluctance to reinvest in a strong market, but you risk certain opportunity costs by not doing so. Strong markets have upward momentum. Ask yourself this question. How many additional market highs have I missed since the day I “cashed in”? My point is this. You’re either a market timer or you’re not. And in order for the market to optimally work on your behalf, you have to remain invested in it.  

In the short-term, the saw-tooth shape of the trend line will cause you occasional anxiety, but as it smooths out over the long-term, enjoy the fact that you exercised the needed patient to allow the Amazing Power of Compounding to work on your behalf. Good luck, whatever course you follow.

How to Keep Savings from Yourself
December 17, 2020

In this episode of Q&A: Real World WynnSights, we explore a growing movement toward employer-promoted savings vehicles, admit the 2020 equities market wasn't all that bad and applaud excellent investing prowess. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion. WATCH THE VIDEO

Q: How do I put personal savings to the side and not touch it?

There are many ways to save, but the key in every case is the saver’s self-control and ability to leave it alone.

There’s a movement growing in popularity among employers that offer 401(k) and other retirement plans. More companies are considering programs that promote savings through payroll deductions to encourage workers to build personal savings accounts. Such non-retirement funds can cover unexpected expenses (Rainy Day funds)… and avoid invasive raids on their retirement funds. Some existing programs are basic, e.g., simply allowing employees to request **split paycheck deposits**. Employers that use the direct deposit method generally offer split deposits to an employee’s checking and savings accounts.

Other employers offer sidecar accounts attached to existing 401(k) plans that allow employees to use payroll deductions to build savings in-house to avoid traditional banks’ minimum balance requirements and account fees. Also, some 401(k) providers offer savings features that permit workers to contribute to 401(k) savings accounts as well as pretax contributions to retirement accounts. This savings feature allows employees to withdraw money from savings accounts for emergencies. But…always a but… in this case, the portion of withdrawals that represents *earnings on the contributions is subject to income taxes*, maybe even penalties.

A survey by AARP found that 71% of employees polled would probably participate in a payroll-deduction, Rainy Day savings program if offered. And… no surprise here… the possibility of an employer match increased the probable participation level of such plans to 87%. But these same folks voiced aversion to a bunch of restrictions on these savings accounts. The survey indicated that folks considered a successful plan one that allowed the freedom to start or stop saving at will, the ability to choose the financial institution where the money is deposited, and immediate access to their funds... in short, to have the cash readily available when needed. Which raises the question of self-control.

Do these employer-related savings plans – or any plan without withdrawal disincentives – run the risk of making it too hard to leave it alone?

Q: Was 2020 a good year to invest in equities? Why or why not?

Despite the unsettling market events of 2020, I would surmise that, so far, 2020 has been a surprisingly good year for equity investors. The so-called Coronavirus Crash, a global bear event that began in late February 2020 and ended in early April 2020, was the fastest fall in financial history… the most devastating since 1929. The abbreviated five-week 30+% decline in February and March was no doubt gut-wrenching for all concerned, but so far, so good for the patient investors among us. On Monday, December 1, 2020, the S&P 500 closed at a high of 3,662.45 (up 431.67 or 13.4% from 2019’s 3230.78 close). From the March 23 low (2,237.40), the December 1, 2020 close (3,662.45) represented a recovery of 1,425.05 or 63.7%. If the market can hold this high ground, it won’t match up with 2019’s outsized gain of 28.9%, but a gain of 13% would be a good year by anyone’s definition, particularly in light of 2020’s pandemic travails.

Highlights Recap:

On 12-31-2019, the S&P 500 closed at 3230.78, up 28.9% for the year.

On 12-01-2020, the S&P 500 closed at 3,662.45, up 13.4% thru November.

On 03-23-2020, the S&P 500 closed at 2,237.40, down 30.7% from 12-31-2019.

On 12-01-2020, the S&P 500 closed at 3662.45, up 63.7% from the 3-23-2020 low.

Q: I have no debt, max out my Health Savings Account and get a company for my Roth 401k. Should I max out my Roth IRA or invest in my company’s stock...or both?

I suggest that you keep maxing out that Health Savings Account. and begin maxing out your Roth IRA versus investing in your company stock. I have a personal bias against folks investing in the stock of the company that also pays their salary… even at a 10% discount. Enron was once a thriving company, too (yes, the origin of my bias has been revealed). You seem to be a very discerning investor – no debt, a routine saver going the Roth route, optimizing the match, and maxing out an HSA. I like your style. Stay the course.

Real World WynnSights: How to Spend 30 Large
December 10, 2020

In this episode of Q&A: Real World WynnSights, I voice support in favor of Health Savings Accounts (HSAs), talk mortgage loan modifications and ponder what is the best use of a $30,000 nest egg. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.

Q: I have $30,000 in savings, no debt, and no retirement savings. Should I invest the $30,000, start my own business, or use it as down payment on a house? I'm 36.

First, let’s place buying a house on the back burner. And as to “starting a new career”, why not first zero in on your educational needs – if any? Reaching a decision about the need for additional education might help clarify what career to pursue… and when. If back to school becomes your choice, it also adds clarity to what to do with the $30,000. School will require financing (unless you get a loan), and any residue should probably be set aside in a safe, liquid Rainy Day Fund and/or in a conservative, short-term investment that might help fund your own business once you reach that decision point.  

In short, you have several balls in the air that require strategic prioritization to best meet your current objectives. Housing and retirement savings can follow at the appropriate time, but at your age I would strongly suggest that you do some prioritizing, and then set your course… age 50 isn’t that far down the road!

Q: Does it make sense to use a Health Savings Account (HSA) to invest in stocks and mutual funds?

Absolutely, but this question requires some background information for those unfamiliar with HSAs. Unlike a Flexible Spending Account (FSA), money contributed to a Health Savings Account (HSA) can be invested much like contributions to a 401(k) or an IRA. And unlike an FSA, HSA contributions are not lost if not spent in a given plan year. They can be carried over from year-to-year, year-after-year. This makes HSAs excellent vehicles for saving and investing to cover healthcare expenses after retirement – when such expenses are likely to increase. BUT, unless you’re enrolled in a health insurance plan with an annual deductible of at least $1,400 for single coverage ($2,800 for a family), you aren’t eligible to contribute to an HSA. And the IRS sets annual contribution limits. In 2020, they're $3,550 for self-only coverage and $7,100 for a family (if 55 or older, participants can contribute an additional $1,000 as a catch-up contribution).

HSA funds can be invested in a selection of options not unlike 401(k) choices.  Also, if invested wisely… and if affordable… it makes sense to pay certain healthcare costs out-of-pocket and leave your invested HSA dollars intact. This approach allows the participant to use an HSA’s investment feature to build a long-term health savings account – one of several tax advantages offered by HSAs.

Curiously, very few HSA participants invest their fund accounts – in my mind, the most compelling reason to enroll in an HSA. Using a Bankrate investment calculator, suppose that at age 25 your qualifying family joins an HSA and contributes the tax-deductible annual maximum of $7,100 (about $592 per month). Suppose further that this money is invested at 7%, compounded annually and grows tax-deferred for 25 years. Suppose after 25 years, tax-free withdrawals from the HSA (now totaling $469,400) are available to pay for qualified healthcare expenses. Quite a stress-reliever, wouldn’t you say? In short, your HSA combines the tax-free withdrawals of a Roth IRA with the tax-deductible contributions of a traditional IRA or 401(k). Or you could simply let it continue to grow another 15 years to provide you with an even larger nest egg ($1,472,000) for healthcare expenses going into retirement at age 65. Assuming a 2% annual inflation rate, you would still have spending power equivalent to $667,000 in today’s dollars. And don’t forget the $284,000 of contributions from age 25 to 65 that your family has been able to exclude from income. The kicker, of course, is that the money must be spent on qualified healthcare expenses… BUT NOT AFTER YOU TURN AGE 65!

When you turn 65, money can be withdrawn for any reason, but if not used for qualified medical expenses, those withdrawals would be treated as taxable income… but no penalty would apply. In short, over age 65 HSA withdrawals would be treated the same as withdrawals from a traditional IRA or 401(k). It’s worth mentioning that the penalty-free withdrawal age for most other retirement accounts is 59½ years old. This treatment is still another reason why HSAs make good retirement savings vehicles.

Wrapping up, those other characteristics that make an HSA such a good retirement savings vehicle include the enhanced family contribution limit of $7,100 ($1,100 greater per annum than for a 2020 IRA); no maximum income threshold as with a Roth IRA; upon retiring, no fretting about Required Minimum Distributions (RMDs) after reaching age 72 as is the case with other tax-deferred retirement accounts; and don’t forget the absence of that onerous “use it or lose it” provision, which enables HSA contributions to be carried over year-to-year, year-after-year and invested.

Q: Should I do a portfolio modification that takes me from a 30-year mortgage at 4.75% to a 15-year mortgage at 2.75%? I can probably get a lower refinance rate, but the hassle and the work involved is a bit overwhelming.

Generally speaking, a mortgage loan modification means extending the length of term, lowering the interest rate, or changing from an adjustable-rate mortgage to a fixed-rate loan. The terms of a modification are up to the lender, but the desired outcome to a borrower is a more affordable monthly mortgage payments. Lenders are often willing to consider loan modification to avoid a costly foreclosure process.

Not everyone can qualify for a loan modification. Typically, homeowners must either be delinquent or facing imminent default, meaning they’re not delinquent yet, but there’s a high probability they soon will be. Without knowing the size of your mortgage, to go from a 30-year, 4.75% note to a 15-year 2.75% note doesn’t seem to accomplish your goal – lowering a burdensome monthly cash outlay – although it would save you a bundle of cash over the long haul. I doubt it’s possible to find a low enough 15-year rate to even approach your current 30-year rate; thus, it appears to me that your best option is to negotiate a lower rate on your current loan, and when your finances permit, do a 15-year refinance to lock in those long-term savings.

Real World WynnSights: Please Don't Liquidate Your 401(k)
December 3, 2020

In this episode of Q&A: Real World WynnSights, I tackle questions about investing in a tough economy, liquidating a 401(k), retirement allocation strategy and alternatives to the 529. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion. VIEW VIDEO

Q: Because we’re experiencing tough economic times right now, what would you consider to be the best investment opportunity?

A: Since I seldom invest in individual stocks (I’m primarily an index fund guy) and most of my investing is on a dollar-cost averaging basis, any current state of economic affairs has very little impact on what I might consider “the best investment opportunities now.” Frankly, I don’t think our economy is in rough waters right now. With a 30,000 Dow and a 3,600-plus S&P 500 at new highs, the average investor seems to be quite comfortable with America’s state of economic affairs.

Yeah, our markets might be bordering on overbought, but they don’t yet seem frothy. Since I seldom follow individual stocks, any opinion I have about them should be taken with a grain of salt, but long-suffering Big Oil and its generous dividends might be worth taking a look at. And I’d be somewhat cautious of Big Tech. They’ve had quite a run (for good reason). I loll in the comfort of low-cost, highly diversified mutual funds… and dare to be average.

Q: What approach should I take to convert my 401(k) investments to cash?

A: I question taking such action. Because interest rates are so low, a cash position is a lot like a bar of gold. Gold produces nothing unless someone is willing to pay more for it than you did. Cash produces more only if interest rates improve. Other than setting aside some cash in a safe Rainy Day fund, it seems to me you need to have exposure to marketplace investments, perhaps earning dividends, interest, and hopefully, capital gains as a result. How do you benefit from the marketplace without being exposed to it? Remember, folks who cash out fearing market declines – or for other reasons – often absorb capital losses, create tax liabilities, or suffer “opportunity costs” by not reinvesting on a timely basis. We invest for good reason. In my mind, setting on surplus cash is not investing.

Q: I am a financially-independent mutual fund investor (100% equities) nearing retirement. Given today’s market, how would you suggest I go about changing my allocation strategy? Also, when retirement comes, should I take the lump sum or annuity?

A: Because interest rates are so low, and because the current climate doesn’t suggest much upward drift in rates, I would be in no particular hurry to adjust my allocation away from equities particularly in light of future inflation potential. In a few years, however, it might make sense to consider investing in some target-date [equity/bond] funds of funds that would automatically involve you in a growing percentage of both domestic and international bond funds. By the way, I like the fact that you keep things simple. As to your pension, a lump sum versus an annuity payout really boils down to greater control of your assets and whether or not you have other regular cash flow sources (social security, part-time work, etc.) to handle monthly expenses. The fact that you have long been a financially independent sort indicates to me that you’re a knowledgeable investor, in which case, I’d be inclined to consider taking a lump sum. You can always purchase an annuity later in life if circumstances indicate the wisdom of such a move.

Q: I want to save for my children's education. Do I have good options other than 529 accounts?

A: You have a number of options, but upfront let me emphasize that using a 529 Education Account is a really wise means of accumulating funds for educational purposes. I recently wrote a blog (The Coverdell vs 529s; 10-22-2020) detailing a 529’s many advantages. But 529 funds must be used specifically for education purposes or the tax-advantaged benefit is lost… as it should be.

A more free-wheeling approach that allows the “benefactor” greater control over investment and disbursement involves devoting a Roth IRA to the education of a child. Roth IRAs have tax advantages similar to 529 plans and are primarily intended as retirement savings vehicles. But they can be used for college planning. Of course, the benefactor won't get upfront tax deductions, but the account will grow tax-deferred and withdrawals will be tax-free no matter how used (as long as you're 59½ or older and have had the Roth IRA for at least five years). However, the benefactor can withdraw Roth contributions (but not their earnings) at any time and for any reason, tax-free. Also, the money held in retirement plans isn't counted as an asset when an application is made for financial aid through the FAFSA. Drawbacks to using a Roth versus a 529 include the annual limitation of contributions to $6,000 (or $7,000 if 50 or older), and using a Roth IRA to pay for college leaves less money for the benefactor’s retirement. Keep in mind, a child will have more years to repay an education loan than the benefactor will have to recoup lost retirement savings.

Technically, another type of 529, a prepaid tuition plan, allows the benefactor to pay for future tuition at current rates. However, they generally apply only to certain colleges and universities in certain states. And unlike regular 529’s, these plans are often limited to covering tuition only.

A more limited but tax-favored alternative to 529s is the Coverdell Education Savings Account (ESA). The Coverdell has a more restrictive $2,000 annual contribution limit for a particular child. Investors filing joint returns are further discouraged from setting up an ESA if their modified adjusted gross income (MAGI) is greater than $190,000 ($95,000 for single filers). Specifically, the $2,000 annual maximum is phased out for joint files with MAGIs falling between $190,000 and 220,000. Such monetary limitations represent downsides to many… and in addition, ESAs are age-limited. Contributions to a Coverdell plan must end when the beneficiary turns 18, and withdrawals for qualified expenses must be distributed by the time a beneficiary turns 30. These limitations are particularly discouraging to investors with large incomes. On the other hand, these same limits appeal to prospective benefactors with lessor resources.

Custodial accounts such as Uniform Gift to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) do not provide tax benefits like a 529 plan, but allow account holders much more discretion regarding investment options (virtually unlimited like Coverdells) and how the money is eventually used. Although proceeds are to be used for a child’s benefit, they’re not specifically earmarked for education… a useful feature for parents unsure if their offspring will actually go to college. Unfortunately, UGMA/UTMA contributions won't earn tax deductions or credits, and such accounts’ earnings are taxable. Also, because they are considered the child’s assets, up to 20% of their balance is counted in computing the Expected Family Contribution on the FAFSA. This is not so with 529 accounts because they are considered to be parental assets - only up to 5.64% of their balance is counted.

November Q&A: Real World WynnSights
November 19, 2020

I’m testing out a new wrinkle. I frequently get questions from folks through Quora and social media channels about their specific real-world financial concerns… both near and long-term. I thought it might be beneficial to share some of those here through a monthly Q&A blog. Names and personal information is excluded to protect privacy. Caveat: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.

Q: As a 20-something, I’m trying to estimate the potential future growth of my investments. What is your opinion of how much the average annual return of the S&P 500 might be over the next 40 years?

A: First, some background: The S&P 500 Index is a group of companies whose stocks mirror the overall performance of large-cap stocks and is considered by many to be a leading economic indicator for both the stock market and the economy. The 500 or so companies chosen by the S&P 500 Index Committee are selected by market capitalization, liquidity, and industry. The average annual return (1957 through 2019) has been approximately 8%. This total nominal return per annum includes dividends but does not adjust for inflation. According to measuringworth.com inflation calculations, the annualized US inflation rate for that period was 3.62%.

To answer the question: I don’t have a clue what the next 40 years will bring. And while that 8% average number over the last 62 or so years may sound pretty darn attractive in light of today’s interest rates, timing is everything. For example, if you are fortunate enough to buy during market lows and wise enough to patiently hang with your investment (or sell at market highs), you will obviously earn larger yields than those who buy during market highs… particularly if they then sell during dips. In 2019, the S&P 500 yield was 31.1%. In 2018, it was -4.41%.

Okay, my answer is elusive, but my point is simply this: Attempting to time the stock market is ill-advised, even though timing always plays a significant role in an investor’s ultimate returns. For young folks (for that matter, any folks) who want to avoid the missed opportunities of not being invested during the good times, avoid active trading, build a portfolio around a low-cost S&P 500 index fund on a “dollar-cost averaging” basis… and then exercise patience! patience! patience! with your investing. I call it daring to be average. Studies show that year-in, year-out, this approach will outperform most managed mutual fund portfolios.

Q: I had to temporarily liquidate 20% of my long-term investments in a Roth account when the market was 5% lower. Now, I’d like to get back in the market without a loss. I don’t believe in market timing, but in light of the current market’s strength, I feel like I should wait. What do you think?

A: Not to be a wise acre, but apparently you didn’t follow someone’s good advice about creating an emergency Rainy Day Fund, the absence of which put at risk your long-term retirement portfolio (often at the worst of times, or so it seems). Now, about the cash you’re stuck with. First, I would create that missing Rainy Day Fund to avoid going through this “liquidation experience” again. And second, don’t fear a strong market like the one we currently enjoy, despite the pandemic. Consider getting back in, but perhaps on a measured basis called dollar-cost averaging (versus “all-in”). This way, you avoid that market timing bugaboo (which by waiting, you’re practicing) while at the same time, you avoid “missed” potential market opportunities associated with not having a market presence. How many times have many of us missed big moves up by thinking the market is already overpriced? Perhaps it is overpriced… but then, perhaps it isn’t.

Q: Today’s stock market gains have exceeded my expectations. I do enjoy them, but I’m not comfortable with dollar cost averaging at these higher prices. And my 80% stock / 20% cash portfolio probably needs rebalancing. Do you think this market is getting too HOT compared to the current state of our pandemic-ravaged economy?

A: Well, these gains exceed my expectations, too… and like you, I am enjoying them… and like you, I’m uncomfortable with dollar-cost average at these high prices… but let’s reflect on history for a moment. How many times have you decided not to invest in a market because you felt it was too high in light of “the current state of the economy”? I’m betting more than a time or two. For that reason, I continue to reinvest surplus dividends and capital gains on a monthly basis (yup, that’s a form of dollar-cost averaging) and if the market decides to do a near-term correction, I’ll patiently set through it like I did the last one – fretting but investing all the while – because that’s how I approach investing. By the way, depending on your current age, you may need to rebalance, but do think twice before letting a strong market interrupt your investment patterns.

Q: My boyfriend starts drawing Social Security this month, at age 62. He is also starting a part-time job with benefits. Can he still contribute to a 401(k)?... hopefully, enough to get the employer match (the part-time job pays about $18,000, so we plan to watch what he earns closely).

A: There’s no short answer to this one. As I’m sure he knows, when your friend starts receiving Social Security (SS) benefits at age 62, the benefit amount will be lower than if he had waited until full retirement age. He can, of course, get SS retirement benefits and work at the same time, but there is a limit to how much he can earn without impacting those SS benefits. If he is younger than full retirement age for the entire year and earns more than the yearly earnings limit, SSA will reduce his benefit amount. SSA will deduct $1 from his benefit payments for every $2 he earns above the annual limit (for 2020, that limit is $18,240). In the year he reaches full retirement age, SSA will deduct $1 in benefits for every $3 he earns above a different limit (in 2020, this limit is $48,600). When he reaches full retirement age, beginning with the month he reaches full retirement age, his earnings will no longer reduce his benefits, regardless of how much he earns.

Now, to address your question. Yes, your friend can contribute to a 401(k) plan and receive employer matches… if available. Disbursements from the 401(k) will ultimately not affect the amount of SS retirement benefits he receives each month. However, he may be required to pay taxes on some or all of his benefits if his annual income exceeds a certain threshold—and 401(k) distributions could cause that to happen. In short, SS retirement benefits do not change based on other retirement income because SS income is calculated based on his lifetime earnings and the age at which he elected to start taking SS benefits. But be mindful that 401(k) distributions might increase his total annual income such that his SS income will be subject to taxes… but only federal and perhaps state taxes. And why is that? Contributions to his 401(k) will have been made with compensation on which he has already paid SS taxes despite the fact that those contributions were made with pre-tax dollars. The 401(k) pre-tax contribution tax shelter feature only applies to federal and state income tax, not Social Security taxes.

The Conundrum: 401(k) income does not affect the amount of an individual’s SS benefits. However, when, at age 72, that individual must take 401(k) RMDs, the boost in a “combined” annual income can result in taxation… or increased taxation. Nothing is simple.

Buying a House vs Buying a Home
November 12, 2020

There’s an old saying, “No one gets rich buying and selling a house or two.” However, lots of folks grow wealthy starting a business, investing in the stock market, or through seed investing (helping a family – or friend – entrepreneur). Only after making some meaningful dough in one of those other ventures should families invest in real estate (in my opinion).

Real Appreciation

Yeah, I know, you hear all kinds of stories about how much homes appreciate, but keep in mind that those stories emanate from the real estate hot spots. Fact of the matter is, from a return on investment standpoint over time, if you’re lucky, your home will appreciate a bit over the rate of inflation. According to bankrate.com analysts, if you purchased a home in 2010 for $400,000, 10 years later it would be worth about half a million. And $80,000 of that number would likely be inflation. During that same decade, an S&P 500 index fund would have doubled in size. In short, you would need to have been employed and bought a home in a booming residential hot spot for it to have doubled in value. I’d call that being lucky twice.

It might be hard to hear this about your most costly asset, but it's important to face the facts about the downsides of owning residential real estate.

Costly Fees

On top of the list is the risk factor. A house locks up a good portion of most families’ net worth that just isn’t very liquid if they need quick cash. In the buying and selling of homes, you also have many “partners”. First on the list are the "Wazoos" that hang around being helpful when folks are buying or selling homes - the real estate agents, home inspectors, lawyers, mortgage brokers, possibly an accountant, and other fee generators that pop up on that lengthy settlement statement. They claim their services to be essential, and they certainly aren’t free. Just as a gentle reminder, it costs almost nothing to buy and sell stocks and mutual funds these days… and the carrying cost of most paper investments (other than dollar erosion) is close to zero.

Nickels and Dimes

Speaking of carrying costs, the annual upkeep of your palace is somewhere in the range of 1% per annum excluding property taxes. Remember, those air conditioning and heating units eventually wear out and that water heater occasionally starts running cold, not to exclude homeowners’ insurance and those small items that nickel and dime you to distraction. A gallon of paint costs WHAT? And don’t forget those aforementioned property taxes that can run 3% and more per annum in… ahem… “low tax” states. You can bet your boots that states with low income tax or low sales tax rates will have healthy (high) property rate rates. And, of course, remember those subdivision association fees that build and maintain courts and pools for the 10% of residents who demand top-notch recreational facilities.

Quality of Life

For those of you who are trying to decide between adding value to your quality of life versus enhancing the value of your “investment," you’d best place the emphasis on quality of life value. More often than not, that upgraded kitchen or bathroom, or the addition of a pool or hot tub simply drains cash from your balance sheet. Come that inevitable sale, such capital investments are rarely recouped. Yes, there are examples of profitable homes – often resulting from the presence of a long term dependable renter or a mom and dad toting the mortgage note – or a home’s market value actually appreciating substantially more than inflation – but don’t spend that “appreciation” until it’s resting in the bank.

Needs vs. Wants

It is wise to consider buying a house more in line with what your family needs rather than what they desire… and investing the “savings” in one of those options mentioned earlier (e.g., starting a business, investing in the stock market, or seed investing).

In short, skip that extra bedroom, that formal living room, that extra-large game room, etc. Five hundred square feet of space not bought at $100/sf is $50,000 that could earn the family several hundred thousand dollars during the life span of a mortgage. For example, you could realize a cost savings of $90,000 over a 30-year span on a $300,000 home vs a $350,000 home (assume paying 20% down on a 3.125%, 30-yr mortgage plus associated HOA insurance and property taxes). Then take the savings and earning 6% on an investment of $139 per month for 30 years ($136,000), compounded annually.

Another rule of thumb to keep in mind: In order to leave enough money to live on, spend no more than 3.5 times your annual income(s) after making a 20% down payment on a home… even less if the family has significant other debt or recurring expenses.

Investment Overkill

Just bear in mind that when house hunting it’s risky to shop with “investment” (rather than “home buying”) in mind. That investment proclivity encourages one to acquire features that “might” later help sell the house instead of what best fits the family in the here and now – a tendency that encourages folks to overpay for square footage that doesn’t fit the family’s needs today.

Yes, any home appreciation will help offset spending power erosion over time, but there are other investment opportunities that will get you to the same place… plus a bit more. Spend wisely when buying a home.

Secure Act 2.0 Proposes BIG Changes to Retirement Plans
November 5, 2020

There is much buzz around the proposed Securing a Strong Retirement Act of 2020, or as some are calling it - Secure Act 2.0. The bipartisan bill recently introduced by Ways and Means Committee Chairman Richard Neal (D-Mass.) and Ranking Member Kevin Brady, (R-Texas), is intended to "...help a greater number of Americans successfully save for a secure retirement." I'm liking it. WATCH THE VIDEO

Secure Act 1.0

The bill has been nicknamed "Secure Act 2.0" because it builds on the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. According to an excellent article published on the Investopedia website by Chris Sonzogni, the highlights of SECURE 1.0 include:

  • Making it easier for small businesses to offer their employees 401(k) plans by providing tax credits and protections on collective Multiple Employer Plans;
  • Allowing retirement benefits for long-term, part-time employees;
  • Removing maximum age limits on retirement contributions, formerly capped at age 70½;
  • Raising the required minimum distribution (RMD) age to 72 from 70½;
  • Allowing penalty-free withdrawals up to $5,000 from retirement plans for the birth or adoption of a child;
  • Relaxing rules on employers offering annuities through sponsored retirement plans;
  • Allowing penalty-free withdrawals of up to $10,000 from 529 education-savings plans for the repayment of certain student loans;
  • Revising components of the Tax Cuts and Jobs Act that raised taxes on benefits received by family members of deceased veterans, as well as students and some Native Americans; and,
  • Raising an estimated $15.7 billion to pay for these changes: removing the stretch IRA estate-planning strategy that permits non-spouse beneficiaries of IRAs to spread disbursements from the inherited money over their lifetime. The new limit will be within 10 years of the death of the original account holder.

Why 2.0?

I learned about Securing a Strong Retirement Act of 2020 after reading "Big Changes May be Coming to 401(k), IRA and Other Retirement Plans" by Rob Berger, Forbes Deputy Editor and Senior Contributor. I dug a little further and found this quote from Chairman Neal about need for the enhanced legislation:

"COVID-19 has only exacerbated our nation’s existing retirement crisis, further compromising Americans’ long-term financial security,” said Chairman Neal. “In addition to meeting workers’ and families’ most pressing, immediate needs, we must also take steps to ensure their wellbeing further down the road. With the Securing a Strong Retirement Act, Ranking Member Brady and I build on the landmark provisions in the SECURE Act and enable more workers to begin saving earlier – and saving more – for their futures. This bill will help Americans approach old age with the confidence and dignity they deserve after decades of hard work and sacrifice.”

I like it even more.

How It (Could) Help

Rep. Brady said the goal is "...to make it easier for folks to save, protect Americans’ retirement accounts, and give workers more peace of mind as they plan for the future.” How? By making changes to 401(k), 403(b), IRAs and other retirement plans, including:

  • Promoting savings earlier for retirement by enrolling employees automatically in their company’s 401(k) plan, when a new plan is created;
  • Creating a new financial incentive for small businesses to offer retirement plans;
  • Increasing and modernizing the existing federal tax credit for contributions to a retirement plan or IRA (the Saver’s Credit);
  • Expanding retirement savings options for non-profit employees by allowing groups of non-profits to join together to offer retirement plans to their employees;
  • Offering individuals 60 and older more flexibility to set aside savings as they approach retirement;
  • Allowing individuals to save for retirement longer by increasing the required minimum distribution age to 75;
  • Allow individuals to pay down a student loan instead of contributing to a 401(k) plan and still receive an employer match in their retirement plan;
  • Make it easier for military spouses who change jobs frequently to save for retirement;
  • Allowing individuals more flexibility to make gifts to charity through their IRAs;
  • Allowing taxpayers to avoid harsh penalties for inadvertent errors managing an IRA that can lead to a loss of retirement savings;
  • Protecting retirees who unknowingly receive retirement plan overpayments; and
  • Making it easier for employees to find lost retirement accounts by creating a national, online, database of lost accounts.

My Favorite Parts

I am encouraged by the entirety of the legislation and hopeful it will emerge unscathed from the Congressional process. If I have to pick favorite parts, I am most supportive of the provision that requires 401(k), 403(b) and SIMPLE plans to automatically enroll employees eligible to participate in those plans; and the provision that raises the mandated age for RMDs from 72 to 75 years old. I'm also excited about the fact that SECURE 2.0 would allow employers to make matching contributions under a 401(k), 403(b) or SIMPLE IRA for employees who are repaying student loans.

Show Your Support

The legislation provides for a number of major changes that could affect folks’ retirement plans in 2021. These are positive changes that would inure to the benefit of all savers. Apply pressure on your legislators if and where you can.

These changes will improve everyone’s retirement package.

Individual Retirement Accounts: Traditional, Roth and Conversions
October 29, 2020

Individual retirement accounts (IRAs) are a blessing, but which way should you lean when it comes to choosing between setting up a traditional IRA or Roth IRA?


Oxford Dictionaries defines a Roth IRA as an individual retirement account allowing a person to set aside after-tax income up to a specified amount each year. Contributions and earnings on those contributions  withdrawn from a Roth IRA after age 59½ are tax-free (provided certain conditions are met). On the other hand, contributions to traditional IRAs are tax deductible, but you pay income tax on both contributions and earnings when withdrawals from the account are made during retirement. WATCH THE VIDEO.

Testing the Limits

First, there is no income limit affecting contributions to a traditional IRA and you can deduct your contributions in full if you and your spouse don't have a 401(k) or some other retirement plan at work. If either of you is covered by a plan at work, however, the IRA deduction may be reduced or eliminated. Not so with Roth IRA contributions, which are definitely income limited. In 2020, for married couples, the limit beyond which Roth contributions are completely phased out is $206,000 and for singles $139,000. For married couples, contributions are gradually reduced for income levels between $196,000 and $206,000 with no restrictions for incomes below $196,000. For singles, the unrestricted lower limit is $124,000 with phase outs occurring up to $139,000.

The 2020 combined annual contribution limit for both Roth and traditional IRAs is $6,000 ($7,000 if you're age 50 or older). And only earned income can be contributed (primarily wages, salaries, tips, bonuses, commissions, and self-employment income). Income not considered “earned” includes investment dividends and interest, child support, alimony, rental income, social security, retirement income and unemployment benefits. Traditional IRA contributions are tax deductible. Contributions to a Roth are not.

By the way, if a spouse doesn’t have earned income and the partner does, he or she can open a spousal IRA. This important feature allows an individual with earned income to contribute on behalf of a nonworking spouse. It goes without saying that to be eligible, the couple must be married and file a joint tax return. This is a rare exception to the provision that an individual must have earned income to contribute to an IRA. The working spouse's [earned] income, however, must equal or exceed the total IRA contributions made on behalf of both spouses. The use of this strategy allows married couples to contribute $12,000 to IRAs per year – or $14,000 if they are age 50 or older.

The Roth Advantage

Because an individual has paid taxes on Roth contributions, he or she can withdraw those contributions at any time and for any reason, tax free – but not earnings on those contributions. However, withdrawals are not recommended (after all, these ARE tax-advantaged retirement vehicles). In addition, individuals won’t have to take Required Minimum Distributions (RMDs) from their Roth account beginning at age 72. Annual RMDs from traditional IRAs – whether needed or not – are a must.

Why Convert?

Food for thought: A conversion from a traditional IRA to a Roth IRA necessarily involves predicting the future. If you think your personal tax rate will be higher in retirement than right now, making after-tax contributions to a Roth account or a conversion of traditional IRA assets to a Roth are in order.

A “Back Door” Roth

Some folks are eligible for direct Roth contributions and others are not (due to income restrictions mentioned earlier). In the first instance, if folks had previously contributed to a traditional IRA and later desire to convert those assets to a Roth, they simply pay federal taxes due on those assets and transfer them to a Roth account.

In the second instance, individuals whose income exceeds the Roth IRA limit can first make pre-tax contributions to a traditional IRA, and then after paying the tax due those contributions, move the money to a Roth account, thereby, sneaking through the back door. In short, this backdoor strategy opens the door to high income folks who normally would be ineligible to make contributions to a Roth IRA.

By the way, even though there are both dollar and income limits to making contributions directly to Roth IRAs, there are no income limits regarding conversions.

5-Year Rules

There are actually three 5-year rules affecting Roth IRAs. They apply if account earnings are withdrawn; if a traditional IRA is converted to a Roth; and if a beneficiary inherits a Roth IRA. Simplified explanations ignoring certain “exceptions” follow:

1. An individual can always withdraw contributions from a Roth IRA with no penalty at any age. At age 59½, withdrawals of both contributions and earnings can be made with no penalty, provided the Roth IRA has been open for at least 5 tax years.

2. The second 5-year rule come into play regarding the conversion of a traditional IRA to a Roth. It determines whether the distribution of principal after the conversion is penalty-free (an individual is supposed to pay taxes when converting from the traditional account to the Roth).

3. A beneficiary who inherits a Roth IRA can take a principal and/or an earnings distribution without incurring a penalty. However, if a beneficiary takes a distribution from a Roth that wasn't held for 5 tax years, the earnings will be subject to tax.

Caveat Emptor

Always the caveats. I’d be derelict if I didn’t mention a few. An individual triggers a Roth conversion simply by paying taxes on the value of the assets transferred, which can be substantial. And if tax rates prove to be lower in the future than now, there’s no resultant benefit. After opening the Roth account, an individual must wait 5 years to take tax-free withdrawals on account earnings… even if they are already 59½. Always a catch when dealing with Uncle Grabby. And figuring taxes can be complex if the individual has other traditional, SEP or SIMPLE IRAs that aren’t converted.

Speaking of Uncle Grabby, individuals making conversions can’t wait until they file their taxes to pay the conversion tax bill. It must be included as part of estimated quarterly taxes due. A “nagging” word of caution in this regard… avoid paying conversion taxes with money from the retirement investment being converted. Paying taxes with IRA funds instead of from a separate account will erode future earning power. It’s never wise to mess around with the Amazing Power of Compounding.

529 vs. Coverdell ESA: Both are Great but Which is Better?
October 22, 2020

The most popular tax-advantaged college savings plan these days is the 529 plan. Any investment vehicle that allows assets to grow tax-free as long as distributions are used for stipulated qualifying expenses is a good thing. But there is the alternative Coverdell Education Savings Account (ESA). Which is better? Worse?Or just better for you? Let's explore. WATCH THE VIDEO

What is a 529?

529s are set up with banks, brokerage firms or mutual fund companies by parents and grandparents who make after-tax contributions that are invested primarily in mutual funds (some plans offer ETFs, bonds, and individual stocks).

The 529 planholder (not the beneficiary) has control of when and how the money is spent even after the plan beneficiary becomes an adult. And parents or grandparents who make contributions to 529s have the ability to direct plan investments among portfolio options – and to choose or change the beneficiary.

What is a Coverdell ESA?

A more limited but tax-favored alternative to the 529 is the Coverdell Education Savings Account (ESA) introduced back in 1998 as an Education IRA. Unlike the expansive 529, the Coverdell has a more restrictive $2,000 annual contribution limit for a particular child (if exceeded, the plan beneficiary will owe a 6% excise tax every year on that excess).

Investors filing joint returns are further discouraged from setting up an ESA if their modified adjusted gross income (MAGI) is greater than $190,000 ($95,000 for single filers). Specifically, the $2,000 annual maximum is phased out for joint files with MAGIs falling between $190,000 and 220,000. Such monetary limitations represent downsides to many…  and in addition, ESAs are age-limited. How so? Contributions to a Coverdell plan must end when the beneficiary turns 18, and withdrawals for qualified expenses must be distributed by the time a beneficiary turns 30. These limitations are particularly discouraging to investors with large incomes. On the other hand, these same limits appeal to prospective benefactors with lessor resources.

The 529 Flex Factor

529s offer greater flexibility than Coverdell ESAs with regard to both contributions and beneficiaries. Parents or grandparents can save for a child, grandchild, other family member, friend – even for themselves. In fact, they can even save for an unborn child and transfer the account to the child after its birth. How’s that for flexibility?

As for contributions to 529s, there is no specific annual limit. However, the total balance per beneficiary is limited to the expected amount of future qualified education expenses – usually between $235,000 to $529,000 – depending upon the state offering the plan. And the gift and estate tax treatment of a contribution to a 529 plan has its pluses and minuses.

The “minus” news first. A 529 contribution is treated as a gift to the named beneficiary for gift tax and generation-skipping transfer tax purposes. By the way, an account can only have one beneficiary, so it’s a good move to open separate accounts for each child and to tailor the investment mix to fit each child’s age. And if you’re making other gifts to the beneficiary during that same year, keep those gift tax limitations in mind.  

The pluses? A contribution qualifies for the current year annual gift tax exclusion ($15,000 in 2020) meaning that most folks can make a substantial contribution without incurring the gift tax. It gets even better. If a benefactor desires to initially contribute between $15,000 and $75,000 for a beneficiary, the benefactor can elect to treat the contribution as made over a five calendar-year period for gift tax purposes. And why is this significant? It allows a benefactor to immediately utilize up to $75,000 in exclusions to shelter a larger contribution and immediately put it to work. Not so with  those Coverdell accounts. In short, this provision enables a contributor to get money (and associated earnings) out of his or her estate faster than if the contributions were doled out over a five-year period.  

A bit more good news. Most states let donors deduct plan contributions on their state income tax return, up to the state's limit. Again, not so with Coverdell accounts.

Financial Aid Impacts

If the student is a dependent and the 529 account is owned by either the parent or the student, the account is considered the parent's asset. Accordingly,  up to 5.64% of the plan’s value will be added to the student's expected family contribution (EFC) - the money one should expect to pay for studies out-of-pocket, which influences the amount of need-based federal aid one qualifies for. This is mainly based on parent income and assets, student income and assets, household size, and the number of students attending college in the household.

If the student isn't a dependent and is the owner of the 529 account, the account is treated as the student's asset and will generally increase the student's EFC at the higher rate of 20% of the account's value.

If the 529 account is owned by someone else (such as a grandparent), it doesn't count as an asset for federal financial aid purposes. But when withdrawals are made to pay for college expenses, they'll generally count as income for the student and will have an impact on the student’s financial aid the following year.

In short, if a parent is the account owner and the child is a dependent, the 529’s savings will have a lower impact on financial aid than a different type of account opened in the child's name.

Investment Options

A 529 planholder controls the funds in the account (i.e., can invest contributions in any of a given portfolio’s several options). However, legislation that created 529 plans specifically prohibits planholders and beneficiaries from investing contributions in other than a specific plan’s provided menu of investment options. Individual stocks normally aren’t included as options because college savings plans can't act as brokers for account owners. Still, the various state plans provide ample choice and opportunity for growth.

Increasing in popularity are so-called "age-based" portfolios – not unlike Target-date funds – that automatically shift to more risk-averse investments as the beneficiary approaches an enrollment date. But remember, portfolio funds do not guarantee a return and are not insured by the FDIC.

Should monetary needs arise for purposes other than qualified educational expenses, the planholder does have access to 529 funds. Of course, taxes on earnings would be due, but no penalty would be assessed on the post-tax amount originally invested. And, if a child winds up with a scholarship, the planholder can withdraw up to the amount of the scholarship. But the earnings on the withdrawn amount would be subject to federal, state, and local income taxes. Uncle Grabby is generous, but not THAT munificent.

Qualified Expenses

529 funds can be used for tuition at a college, university, trade school, vocational school, and expenses required to participate in apprenticeship programs. Qualified expenses include room and board, fees, books, supplies, equipment, computer hardware and software, internet access and related services. Other qualified expenses include payments of student loans for college, university, trade school, vocational school, or apprenticeship programs (up to a $10,000 lifetime limit per beneficiary). Also, money can be spent on K – 12 tuition (up to $10,000 per student per year at a public, private, or religious school).

Thanks to the Covid-19 pandemic, what constitutes as qualified educational expenses under both 529 and ESA programs have been expanded to accommodate increased remote-learning.

Take Your Pick

A prospective planholder can invest in any state's 529 plan and use the funds to pay for any school in the United States or abroad so long as the school is considered an eligible education institution. If a child doesn't end up going to college, grad school, or a trade/vocational school, the planholder can shift the money to another qualified family member to use for qualified educational expenses. And as previously mentioned, the planholder can use the money for non-qualified expenses, but penalties on earnings (not contributions) would apply. A change of beneficiary of an account can be done at any time as long as the new beneficiary is a qualified family member of the original beneficiary.

In summary, whether you take the Coverdell ESA or 529 approach, there is a plan out there that fits folks of all income levels. Check the one that best fits you and your beneficiary’s needs and start saving now.

The Sad State of Personal Finance Education in Schools
October 15, 2020

A recent Wall Street Journal “Letters To The Editor” missive by John F. Quilter caught my eye, which I will quote verbatim… except to add that Quilter’s suggestion should apply to all U.S. high schools, public and private, not just those in California:

California [all] schools could better educate and prepare their students for adult life if they ... introduced a mandatory course in personal finance covering such topics as managing credit, investing in fixed-income and equity instruments, managed funds and index funds, mortgages, insurance concepts, retirement accounts, income-tax matters and a host of other topics they will have to deal with as adults. This becomes even more important as Social Security becomes ever more shaky and defined-benefit pension plans fade away.

Is anyone paying attention? Apparently, not many.

According to the 2018 Survey of the States: Economic and Personal Finance Education in Our Nation’s Schools conducted by the Council for Economic Education (CEE), only 17 states required that high schoolers take a personal finance course. Since then only four additional states have been added to that list.


Unfortunately, without a working knowledge of personal finance, young adults are likely to lead a completely different life than someone with personal finance knowledge. Living paycheck to paycheck is a common trait of those without such knowledge. Personal finance training provides young adults with the knowledge and understanding to make smart money decisions… gain more control over their own lives… attain more empowerment to do those things that matter most to them.

Are parents or guardians of these young people paying attention to this lack of training? You should be. A member of your local Board of Education probably lives nearby – perhaps next door – might even be sitting on your living room couch watching TV. Bend an ear. Exert some pressure. Your kid will be glad you did.

Interest Rates: How Low Can They Go?
October 8, 2020
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.” --- Charles Dickens

The Federal Reserve seems to be signaling that short-term interest rates will remain a fact of life for, perhaps, years to come. Wise? Foolish? Time will tell. But what does a lengthy period of near-zero interest rates mean to folks in the here and now? Well, like most things, it depends.


Predictable Patterns

The 10 Year Treasury is the benchmark used to decide mortgage rates across the U.S. and is the most liquid and widely traded bond in the world. The current 10 Year Treasury yield as of September 21, 2020 was 0.68%. On September 21, 1981, it peaked at 15.68%. Except for its recent plunge, the 10 Year Treasury posted its lowest rate of 1.46% on July 25, 2016. Currently, interest rates are at levels not “enjoyed” for over 50 years. Predictably, low interest rates encourage folks to buy homes or refinance old mortgages carrying higher rates of interest. In the current environment, mortgage rates will likely remain low.

This should be a benefit to home builders as well as to families either downsizing or cashing in home equity for retirement purposes. Low rates have already spurred major refinancing - an activity that will run its own course in time – and also because many banks are setting refinance rates higher than that for mortgages. It stands to reason that folks with excellent credit will benefit the most from low interest rates. But if lending institutions as many predict tighten lending practices, those viewed as credit risks will be left with fewer options to finance their endeavors.

Costs and Benefits

Those among us who save, invest, and occasionally lend, could both benefit AND suffer in a persistent low rate environment. The more well-to-do savers…those most likely to lend to lend to entrepreneurs…will have less incentive to do so, increasing the difficulty of risk takers to find backers for their bold new ideas. For older folk, it could mean delaying retirement and for younger adults, delaying or bypassing higher education. Equity investors could benefit as conservative bond holders among us seek higher yields elsewhere, providing additional support to the stock market. In short, it really depends on where a company, a family, or an individual falls on the financial continuum.

Some Will Suffer

Those risk-averse holders of cash or folks who traditionally hold assets that produce a steady income stream (i.e., retirees) will likely suffer in this low rate environment. And folks who invest in what I call “shifting asset accounts,” like 529 education funds and target-date retirement funds that reallocate to bonds as college or retirement milestones approach, will experience lower yields, and thus less income from those assets.

These diminished streams of income will inevitably encourage investors to consider tradeoffs. Due to lowering rates, if a 529 account does not generate sufficient funds to send a child to college, should that child’s education be delayed? If not, are other funding opportunities available? Will parents consider less expensive colleges and universities viable options? Are low-interest student loans available? If so, are they financeable?  Delaying the education of a child comes with its own set of opportunity costs…primarily the loss of incremental future earnings.

Delaying retirement – whether early or not – may be an even bigger issue because of the sheer numbers of people involved. It’s virtually inevitable that people will be saving (and earning) less money in 401(k)s, 403(b)s, 457(b)s, IRAs, and other retirement vehicles…or perhaps having to take Social Security benefits earlier than planned, reducing long-term inflation-adjusted monthly income for life. Without question, those dependent on interest income or who planned on interest income being a significant part of their cash flow for whatever reason, will suffer from an extended low interest rate environment.

Silver Linings?

Aside from reduced mortgage and refinance rates in housing, where might we look for silver linings? Will credit card interest rates drop? Millions of folks are dependent on credit cards to get them through unexpected cash crunches; thus, reduced credit card rates would be a Godsend…if  they happen. But experts predict “perhaps down a little, but not likely much.” Financial institutions are very hesitant to reduce credit card rates due to the traditional high loss factor. In light of that, low interest rates in general might actually motivate folks to create or beef up their emergency funds instead of relying too heavily on credit cards as a fallback position. Those who already park cash in such easily accessible accounts will be quite comfortable with Rainy Day fund rates, which are typically held in low-yield accounts.

A low interest rate environment will likely tempt folks to assume more risk in their investing. Many believe, including me, that today’s strong market is in no small part the result of people chasing yield…often without being mindful of the associated risk. A Fed-induced low interest rate environment, in addition to helping the federal government finance its staggering debt, is designed to encourage us to spend more and invest in riskier assets. Low rates induce that sort of behavior.

Vulnerable Retirees

Probably those who are most vulnerable to the negative impact of a low interest rate environment are retirees or those approaching retirement. Historically, this risk-averse group has relied more heavily on investments in bonds or bond-like instruments for income. Loss of those once-comforting bonds yields, the replacement of  company pension funds by employee-directed 401(k)s, etc., and the looming threat of reduced Social Security benefits have been reinforced by Fed action in recent years and is expected to continue for the foreseeable future.

Pandemic Day Trading is not all Glitz, Glamour and Easy Money
October 1, 2020

The volatile pandemic stock market has drawn new day traders into its seductive embrace by the millions. They are mesmerized and incentivized by no-commission trades, boredom in lockdown, and by a phoenix-like recovery from the depths of the March 2020 stock market debacle. Along with the glitz and glamour, many new traders are learning important lessons. WATCH THE VIDEO

Hard Lessons

Hard Lesson #1: Markets don’t always go up.

Hard Lesson #2: Each non-retirement account transaction is likely a taxable event, and in the case of successful traders, Uncle Grabby’s IRS is waiting for its cut.

In short, a day trading enthusiast must not only be a “savvy” trader, but an individual knowledgeable in certain provisions of the U.S. Internal Revenue Code, as well. Did I hear you ask why?

Taxable Gains & Losses

Well, here’s why. When trading in taxable accounts, each trade is likely to generate either a taxable gain or a loss that can offset a taxable gain if one exists. Those off-setting losses can be particularly important, and, yes, they do happen. The “savvy” investor will quickly learn to optimize after-tax profits by timing when to sell both winners and losers – or by selling one lot of a particular company’s shares instead of another lot. We’ll talk more about “lot selling” later. First, some fundamentals.

Year-End Results

As a “silent partner”, Uncle Grabby is not particularly interested in how much you gain or lose on a specific transaction. Rather, he wants to know the net result of your total transactions at year’s end.

Arriving at that number begins with figuring the gain or loss on a specific sale by subtracting the asset’s purchase price (plus odds and ends) from the sales price. The net is your gain or loss on the sum total of those transactions. Logically, if a trader’s gains exceed losses, a capital gains tax is owed. If losses exceed gains, no tax is due.

Credit For Losses

Because Uncle Grabby is a generous old dude, in the case of a net loss he will allow you to deduct up to $3,000 against ordinary income earned in that same year. Sad to say, not infrequently day traders’ annual capital losses exceed $3,000 in which case they can carry forward the excess to first offset capital gains and then up to $3,000 of ordinary income in future years until the losses are exhausted.

22% Tax Rate

Day traders usually aren’t eligible for the lower tax rates that apply to long-term capital gains – investments held for longer than one year. Long-term capital gains tax rates are 0%, 15%, and 20% depending on an individual’s income. The net profit of a day trader’s transaction is typically short-term in nature and taxable at the higher rates used for ordinary income… often 22% or more. This is an important distinction when deciding to sell shares of the same stock bought at different times and prices.

To minimize taxes, it makes sense to sell the stock with the least capital gain considering both the net margin (gain or loss) and whether or not it is short- or long-term. Of note, should the investor not specify which lot of a particular stock is sold, the default movement from inventory is typically first-in, first-out (FIFO).

Trader Tax Break

Thanks to Obamacare, there is a 3.8% surtax on net investment income above certain earnings thresholds, and some states have high income tax rates and offer no reduced rates for capital gains. Countering those tax considerations is a tax break available to some day traders who claim that trading is their business – not a sideline gig – and are able to deduct certain expenses (home office and related expenses, computers, tax preparation, etc.) on Schedule C of their tax return. Uncle Grabby’s requirements to gain these benefits are rigorous, involving certain numbers of trades per year and hours of trading per day and week.

Not Easy Money

Although the current volatile market and ease of entry has gained the attention of millions of folks, it’s probably not for the uninitiated and it’s not easy money. Markets do fluctuate, and to be sure, Uncle Grabby is a most willing participant in sharing your winnings. So be aware of the tax angle.

Because I am a persistent and conservative index fund investor, I will again remind my audience of another approach… the PDQ Principles of investing – an approach built around index fund investing that involves purchasing (on a dollar-cost average basis) low-cost, highly diversified, quality products and then exercising a boat-load of patience while letting the Amazing Power of Compounding work its magic.

Be diligent in your trading and good luck.  

Trying to Beat the Market is Futile - and Fleeting
September 24, 2020

By investing in index funds you surrender your quest to be on top of the market, knowledge-wise. Daring to compete on behavior versus talent is not an easy thing to do. But it gets easier when rewards for this humility begin to appear – once your focus on behavior (discipline) leads to improved success in managing your portfolio.

Can't Beat 'Em

Beating the market is extremely hard to do. Accounting for what’s known as “survivorship bias” (the attrition rate of poor performing mutual funds), over a recent 15-year period, roughly 92% of large-cap funds lagged the yield of a simple S&P 500 index fund. Mid-cap and small-cap funds lagged their benchmark indexes even more - roughly 95% and 93%, respectively. In short, the odds that you’ll do better in an actively managed domestic fund (versus an index fund) are about 1 in 20. That’s why I dared to be average years ago!

Certain “friends” suggested that, in my case, being average probably came quite naturally. And I agree. I’m not the proverbial sharpest knife in the drawer, but I am very disciplined when it comes to investing. The professional investors I have to compete with (I call ‘em Wazoos) are very smart, very hard-working, and they number in the thousands. How can I expect to match up with this brainy crowd in time and effort spent?

A Slight Edge

An index fund simply seeks to match the performance of a stock index (e.g., the S&P 500) by buying shares in all of the companies in that particular index. Studies show that index funds beat the vast majority of actively-managed funds over time in large part by keeping the costs of investing low. I particularly love that feature, but it’s not the main reason many small investors like myself gravitate toward index funds. Finally, we have a tool that plays to our strength – in my case, at least. Its separates behavior from the Wazoos’ superior knowledge of the marketplace. In short, it gives small investors a slight edge, daring to be average, as opposed to working their collective butts off trying to compete with the talented Wazoo crowd.

Average is "In"  

Next to saving, one of the most difficult results to accept as an investor is daring to be average. But it’s an index fund’s essence…its basic fundamental. Think about it, if you invest in a Total Stock Market Index fund, or less broadly, an S&P 500 Index fund, you’ve deliberately chosen to be satisfied with the broad market’s yield. “Why,” you ask, “would I want to just be average?” Truth be told, you’re not just being average. Study after study of index (passive) fund results show that over time, they outperform managed (active) funds. And those occasional fund managers that outperform index funds aren’t necessarily the same fellows and gals year-in, year-out.

In short, today’s hero could just as easily be tomorrow’s scapegoat.

Do Nothing

What you soon learn is that doing nothing is often the best practice once you’ve established a pattern of regular investing (i.e., dollar-cost averaging) into appropriate index funds (occasionally adjusting for risk as circumstances change). Like John Bogle and other conservative icons have so often commented, “Don’t just do something, stand there”. Of course, many Wazoos will recommend that you do just the opposite. Gotta keep those transactions (fees) flowing. In short, they often advise, “Don’t just stand there, do something”.

Hard Lessons

After throwing in the towel on time and effort, I soon discovered that I was equal to the task when it came to patience and discipline. Call it being lazy. Call it daring to be average. Call it what you want, but I learned some valuable lessons in the early 80s. Being part of the thundering herd didn’t appeal to me. As a part-time, break-even kind of investor… an amateur… I had to find a new gig to stay in the “yield” game with the Wazoos. That search led me to John Bogle’s Vanguard and his, at the time, much maligned index funds. Life quickly improved – became less stressful and certainly more rewarding.

Hocus Focus

What I’m suggesting is that once you’ve dared to be average by dollar-cost averaging into index funds, your remaining and constant challenge is to focus, focus, focus on your behavior pattern – be better than the Wazoos at doing nothing. And it ain’t that easy being patient, folks! Doing nothing while a Bear Market is nipping at your butt goes very much against human nature’s survival instinct.

I’m proud to say I stayed the course during both the Great Recession of 2007-2009 and today’s Covid-19 Recession. I endured those major downturns, plus others, by doing nothing except continuing to invest the same amount of money in the same funds on the same day of every month (I’m crossing my fingers about the Covid-19 affair… it ain’t over yet).  In any event, those cheap units patient investors acquire during the bad times do wonders for portfolios during recovery. Admittedly, it wasn’t always pleasant reviewing my monthly statements during those grim times, but I still have a few strands of hair.

However, a couple more fell out this past week.

The Pandemic has Millennials on Financial Pins 'n Needles
September 17, 2020

It’s a fair statement to suggest that younger people – Millennials, for example – have suffered some particularly catastrophic economic hardships in recent years. VIEW VIDEO

Catastrophic Economics

Studies show that Millennials – those born 1981-1996 and now in their mid-20s to late 30s – have accumulated much less wealth than their parents and grandparents had at similar stages in their lives. This could be attributed to those catastropic economic hardships. Case in point is the older group of Millennials whose financial short straws started being drawn during the recent Great Recession that began in December 2007 and ended in June 2009. Having already suffered a less than ideal job market during those years, they and their younger cohorts are now being battered by multiple Covid-19 pandemic torments… if not the virus itself, a job loss, a pay cut, a temporary layoff, a loss of health insurance, etc. “What to do?” they might be heard muttering.

Pandemic Pins 'n Needles

An obvious first thing to do in the instance of job interruption or loss is to determine your eligibility for unemployment insurance, and if eligible, to apply. The CARES Act signed into law in March 2020 provided pandemic-related unemployed workers with an additional $600 per week on top of regular unemployment benefits, but that ended in July and has yet to be renewed by Congress. However, the President signed an August 8 executive action partially restoring the lapsed $600-a-week unemployment supplement. Under this edict, the federal government is providing unemployed workers an extra $300 in weekly payments. Forty-four billion dollars from FEMA’s Disaster Relief Fund is being used to finance the benefit until it's exhausted.

Confronted with job losses, Millennials must consider where they can save the most – perhaps in housing by moving in with family or renegotiating rent or lease payments with a willing landlord. Failing that, it then becomes a matter of prioritizing rent and mortgage payments with groceries, utilities, and other essentials.

If you still have a job but haven’t yet started an emergency fund, start one if at all possible. Rainy Day funds represent a firewall against both unexpected financial challenges and against having to interrupt long-term retirement savings plans.

Debt Conundrum

Along with credit cards and mortgages, many Millennials still face the prospect of paying off those pesky and burdensome student loans. Because many lenders have programs to help debtors address financial difficulties, now is the time to discuss “revised” payment options with them. If student loan deferrals or mortgage refinance opportunities are available, resultant savings might be redirected into a Rainy Day fund. Whatever you do, don’t fail to address these financial problems head on. To those fortunate enough to have long-term savings, if possible, avoid raiding these valuable retirement accounts to pay off debt. But don’t let debt pile up that will plague you for years to come. Therein lies the conundrum.

Retirement Life Raft

If your financial woes are attributable to Covid-19, and if you have a retirement plan and all other sources of financial relief have been exhausted, under terms of the CARES Act, you may qualify to withdraw up to $100,000 from retirement accounts through December 2020… without penalty, if under 59½ years of age. Personal income tax will be due on the amount withdrawn, but it’s payable over the following three years. Such a distribution could be paid back anytime during that period and a tax refund claimed on any taxes already paid. This withdrawal option should be avoided if possible because of its potential negative impact on future retirement plans, but folks must occasionally do what they have to do during sudden financial setbacks in their lives.

Skill Redux

If a temporary layoff becomes permanent, this might be the time… call it an opportunity… to learn a new skill or enhance existing qualifications that might help land a new job. Online courses are readily available and new skill sets might be gained by doing different types of part-time work. You might even consider going back to school to train for a career in a promising “new” industry as opposed to one decimated by the pandemic or technical obsolescence. In short, acquiring new skills, building new relationships, and focusing on developing trends will put you in position to grab emerging opportunities when presented. Broaden your thinking and focus on these new challenges. By the way, developing these sorts of outlooks are good even in “normal” times.

Financial Wellbeing

Managing your financial wellbeing, particularly during hard times, can be incredibly stressful, but carefully monitoring your credit is especially important in your overall financial wellbeing. Because current personal financial dilemmas are so widespread, the three top credit agencies – Equifax, TransUnion, and Experian – are all offering free weekly access to credit reports through AnnualCreditReport.com.

If you need career advice, reach out to family, friend, and workplace networks for trustworthy help. Thousands of people are currently dealing with serious financial circumstances, and it’s highly likely that someone in your circle will be more than willing to provide advice or encouragement in this time of crisis. Help is out there. Go for it.

And remember: This, too, shall pass.

Dare to be Average and You'll Come Out on Top
September 10, 2020

In my The Amazing Power Of Compounding blog, I mentioned a growing concern about individual investors’ increasing proclivity to trade stock in today’s volatile stock market. Investors – particularly young, inexperienced investors – tend to believe that they can “beat the stock market." At one point, I, too, held that belief. Experience taught me otherwise leading me to develop a taste for the average. Let's discuss the concept of "Daring to Be Average."

What's Average?

I once felt that diversification – a form of loss mitigation – would limit my rewards. And it’s true. Bad picks will limit the reward of good picks. For example, by selecting an index fund, you are acquiring an ownership in its low-performing companies as well as its average and high-performing companies. My original thinking was that although I happened to be a “part-time” investor, I could also be an above-average investor… that I could successfully compete against the pros (Wazoos, I call ‘em). Well, like most amateur and/or part-time investors, I couldn’t. Coming to that realization steered me in the direction of building a portfolio around index funds and accepting the humbling experience of daring to be average. My ego was soon soothed by an increasing number of studies showing that unmanaged index funds routinely outperformed Wazoo-managed funds. And, yes, diversification helps manage risk.

Do Rewards Require Risk?

Risk and reward are most certainly connected. High risk can be rewarded with high returns. But that same measure of risk can also be rewarded with low or no returns. An undiversified portfolio combined with good luck can achieve amazing returns… but with bad luck (and luck is part of the investment game) it can be a devastating experience. On the other hand, a diversified portfolio combined with good luck can achieve those same amazing results… but with bad luck, a devastating result can be somewhat mitigated through diversification. In short, not all risk is rewarded, but a stretch of bad luck can be mitigated by proper diversification.

Mitigating Risk

The Amazing Power of Compounding is a function of time and yield. But the time factor deserves some amplification. There’s a common perception that the risk of stock ownership declines as the investment horizon increases. I don’t agree. Holding a stock for a long time doesn’t reduce or eliminate its risk. Nor does holding a diversified portfolio for a long period eliminate the risk factor. In the latter case, the risk is simply mitigated because of diversification… not eliminated.

Dollar-Cost Averaging  

I utilize dollar-cost averaging in investing because it offers the risk-reduction benefit of investing over time. It involves investing the same amount of money on the same day each week or date each month… in for example, a Total Stock Market Index or S&P 500 Index Fund. Dollar-cost averaging over a period of time theoretically lowers the risk associated with lump-sum investing. But note that I said, “over a period of time”. Once a period of time ends, normal investment risk reappears. To genuinely enjoy the fruitful “risk-reduction” of dollar-cost averaging, it must continue long-term. The only real benefit of “short-term” dollar-cost averaging is avoiding disappointment… an emotion decision-makers feel when they realize, after the fact, that another choice would have been more profitable (i.e., taking a big loss on a lump-sum investment versus a smaller loss by dollar-cost averaging over time).

Rolls Royce v. Chevy

When I (often) speak of my PDQ Principles, I am obviously inferring that, along with Patience and Diversification, it is important to invest in high Quality companies. That’s common advice, but is it necessarily good advice? It depends on a couple of questions we must ask ourselves when making important buying decisions. Without question, at fixed points in time, some companies are of higher quality than others. But are those “really good” companies worth the difference in price over "less good" companies? A Rolls Royce is a better car than a Chevy, but is it that much better? Is the investment in stocks of great companies better than in companies that are not so great? This is when valuation becomes important.

Value is Relative

During the buying process, it is especially important to consider the price of stocks relative to their value. Seven years ago, Exxon Mobil was the world’s most valuable company. Last Friday, Tesla, a company struggling for profitability, was valued by investors at $390 billion, twice a very profitable Exxon’s current market value of $165 billion. And Apple computer lost $180 billion in value that same daymore than Exxon’s total current valuation. By the way, if you’re lamenting last Friday’s losses in the stock market, the Omaha Sage, Warren Buffett, lost $19 billion on his position in Apple alone. That’s why I stick with mutual funds – in large part, index funds – and dare to be average.

Ditch Day Trading

Each investor has his or her own agenda and risk tolerance. Some become speculative day traders, where today’s gains can be quickly eroded by tomorrow’s losses. That was my experience, finally prompting me to ask, “Why gain 25-30% this month and lose most if not all of it next month?” More conservative, long-term investment practices might not deliver those occasional sensational results, but a highly diversified, buy and hold approach is a powerful form of risk mitigation that appeals to the dare to be average crowd. Yes, there are those with the proper tools and skills to be extraordinarily successful at day trading, but it’s a stressful approach with little appeal to me.

Short-Term Speculation Erodes the Power of Compounding
September 3, 2020

According to the experts at Bloomberg Intelligence, the three biggest firms that execute individual investors’ orders traded a combined 69.4 billion shares over the counter in June 2020, more than triple the level from November 2019. This trend encourages me to remind those who follow this blog of the impact compounding plays on the accumulation – or diminution – of wealth. VIEW VIDEO

Compounding Core Values

Compounding is at the very core of developing an optimal long-term saving and investment program… and its value is THE primary reason why my target audiences are the younger generations of savers. Simply put, they have more time to benefit from compounding. Too often, unfortunately, they display the least amount of patience. And why does that matter? According to the 90-year-old Sage of Omaha, Warren Buffett:

“Building wealth depends not only on how much your money grows, but how long it grows.”

BTW: The Sage’s wealth is estimated to be over $80 billion, 90% of which he acquired after age 65.

In a recent WSJ interview by Jason Zweig, Buffett mentioned what he termed his Methuselah Technique:

“Investing wisely is important, but investing wisely for a long time matters even more.”

Astounding Example

Zweig mentioned in the WSJ article that most folks routinely underestimate the power of compounding (an observation with which I absolutely concur)… and that such errors worsen over longer time horizons and at higher rates of return. He offered an example inspired by Buffett. It’s a theoretical exercise, but what an attention grabber! If the Dow Jones Industrial Average (DJIA)… about 29,100 yesterday… compounded at slightly under 1.6% annually, what would it be on December 31, 2099? The answer: 100,000.  What if it earned 4.6% annually? The December 31, 2099 value would be 1,000,000. And what if it earned 7.7% annually (below its 8.4% average over the past 30 years)? 10,000,000 by December 31, 2099.

In a nutshell, that’s the potential of The Amazing Power Of Compounding. Crazy numbers… not so much. In August 1940, the DJIA was roughly 130. On September 2, 2020, it closed at 29,100. By the way, none of the rates in the Zweig/Buffett example include the reinvestment of dividends.

Patience is Vital

As I’ve often mentioned in my blog posts, even while experiencing low to moderate rates of return on investment portfolios, lengthy periods of steady growth can morph small sums of money into large amounts. But it takes a truckload of patience and the steady accumulation of a low-cost, highly-diversified, quality portfolio to take advantage of compounding. For this reason, it’s troubling to see more and more speculation by folks – particularly younger investors – buy and hold stocks for noticeably short periods of time… so very destructive to the essence of compounding.  

Buffett’s Folly

Buffett revealed an interesting inclination (that also afflicts yours truly) in his interview with Zweig… a habit of the afflicted that causes them to weigh a “current” expenditure against what they might be able to buy with the same money compounded for decades into the future. An example used was the initial $31,500 cost of Buffett’s Omaha home. He called the “then troubling” 1958 acquisition "Buffett’s Folly" in The Snowball, written by Alice Schroeder. In his mind, the cost of the home was $1 million after compounding its initial cost into the future. He wasn’t far off. The home is now worth close to $700,000 and the $31,500 he spent on it in 1958 is equivalent to about $250,000 in today’s dollars.

Stop Starting Over

To my young investor friends, the more often you trade holdings in your investment portfolio, the more you disrupt compounding. After each disruption, you essentially start the process all over again. In short, avoid excessive trading. Follow those PDQ Principles of investing. Buy low-cost, highly-diversified, good quality investments, and then exercise the patience of Job with your portfolio. You’ll be glad you did.

Hoarder Alert: Know When to Toss Financial Docs
August 27, 2020

Many of us swear that we’re not hoarders, and in many respects, we’re not… until it comes to throwing away old financial records of all types. The Motley Fool shared this sort kind of information with their readers recently, and because the Fool seemed to have targeted me directly, I decided to pass along some of their thoughts. VIEW VIDEO.

Tax Returns

After reviewing the Fool's remarks, I did a quick inventory of my file room…  soon realizing that when it comes to retaining financial documents, I deserved the target on my back. I have federal tax returns going back to the year Teddy Roosevelt and his Rough Riders charged up San Juan Hill in the late 1800s, forcing Cuba’s Spanish overlords off the island. That’s an exaggeration, of course, but I still have all of ‘em, and I’m not a spring chicken.

One early return documented that I swept floors for Oklahoma State University for $.50/hour. They also charged me $4 per hour for tuition, so I suppose it evened out. Generally speaking, the IRS suggests that you keep returns (and supporting documents) for three years; six years if you overlooked reporting certain income; seven years if you file a claim for a loss from worthless securities or bad debt deduction; and indefinitely if you filed a fraudulent return or didn’t file one at all. And by the way, if you’re employed by others, keep paycheck stubs through the end of the current year as a check against your employer’s W-2 form. Uncle Sam is watching.

Mortgage Must-Keeps

Keep mortgage or mortgage refinance documents for as long as you own your home. Prior to selling a home, keep paperwork related to its purchase and of any major work to improve the home (to support the home’s cost basis at point of sale). After a sale, hang onto those prior records along with records related to its sale for at least six years.

Insurance Policies

Keep life and other insurance policies indefinitely (as long as they are in effect). Speaking of insurance policies, keep receipts for all costly acquisitions in case of theft or catastrophic loss for purposes of confirming the purchase price to skeptical insurers.

Estate Records

Keep all estate-related items such as IRA contributions and other pension-related records indefinitely…  including of course, your last will and testament, durable powers of attorney, medical powers of attorney, directives to physicians and HIPAA releases.

Medical Docs

If you have included a medical tax deduction on your return, the IRS allows itself up to seven years to request documentation related to your health insurance records. These same records and explanation of benefits (EOBs) might also be useful in sorting out after-the-fact difficulties with medical service providers.   BTW - an explanation of benefits is not a bill. It is dispensed to both patient and provider as a means of identifying how a claim is processed and what amount may be owed by the patient.

Monthly Statements

If you verify bank and credit card statements upon receipt… if you balance your checkbooks periodically… and if you have online access to these statements, there is really no reason to keep the monthly paper documents. Certainly not for more than one year.

Trade Confirmations

Unlike bank and credit card statements, trade confirmations and brokerage statements should be kept as long as you own the securities they represent. This is how you will ultimately document your basis in the securities you own when sold. Remember, Uncle Grabby is watching, and occasionally he will inquire about tax basis documentation.


Titles to vehicles and other valuable assets (i.e., real estate, etc.) including documentation of improvement and/or insurance claims on these properties should be kept for as long as such assets are owned.  

Shred the Evidence

In summary, don’t be a financial documents hoarder, but do keep certain documents that will prove useful in the conduct of your family’s financial dealings. But in this age of hacking and meddling, once you decide to discard important financial documents it’s important to remember that more than Uncle Grabby is watching. There is an industry of ne’er-do-wells out there looking for every opportunity to syphon off your various account numbers, Social Security number, date of birth, and other identifying information. So, consider shredding all discarded documents. And, for your own purposes, back up all important digital documents and store paper versions of those documents you choose to retain in a safe place to avoid theft or catastrophic loss.

Capital Gains - and Possible Change - Explained
August 20, 2020

Concerns abound regarding a capital gains taxation upheaval should the approaching November election result in a change in the Washington power structure. The most prevalent concern involves “step-up” rules on capital gains (and losses) of inherited stock, so I thought some refresher information on the subject might be in order. VIEW THE VIDEO.

What is a Capital Gain?

A capital gain is the profit generated by the sale of an asset such as a stock, land, a business. Generally speaking this is considered taxable income. The tax rate on capital gains vary based on how long an asset has been held before selling, the seller’s income during the year of sale, and in what type of financial vehicle the gains-generating asset is held (i.e., tax-advantaged account, taxable account, etc.).

In 2020 the capital gains tax rates are either 0%, 15% or 20% for most assets held for longer than a year. For less than a year, tax rates on most assets correspond to an individual’s ordinary income tax brackets (10%, 12%, 22%, 24%, 32%, 35% or 37%). Since we’re discussing inherited stock here, the foregoing information suffices only as a clarifying prelude to our subject matter.

Tax-Advantaged Accounts

Tax-advantaged accounts include 401(k) plans, IRAs (traditional and Roth) and 529 college savings accounts where investments grow tax-free or tax-deferred. In short, you don’t have to pay capital gains tax on investment sales within these accounts as they occur. Roth IRAs and 529s, in particular, offer significant – tax-free – qualified distributions. That’s right, you don’t pay any taxes on such investment earnings. With traditional IRAs and 401(k)s, however, you’ll pay taxes when you receive distributions, required (i.e., RMDs) or otherwise, from those accounts.

Inherited Stock Gains

So, what is the tax on inherited stock gains? As mentioned earlier, it depends on the financial vehicle holding the gains-producing asset. But one simple fact never changes – Uncle Grabby always gets his cut, now or at some future date whether capital gains occur in a tax-deferred traditional or Roth IRA, or if a person (decedent) dies and leaves shares of stock to his or her heirs in a taxable account.

With regard to Roth IRA assets (purchased with after-tax dollars), Grabby has already taken a bite from that apple; thus, withdrawals are generally tax-free to the lucky heirs. With traditional IRA assets (purchased with pre-tax dollars) withdrawals are treated as taxable income – paid at the individual’s ordinary income tax rates, not at capital gains rates.

Taxable Accounts

For inherited stock held in non-tax-deferred accounts, a different set of rules called “step up” rules apply. In short, an heir’s cost basis in a stock is its fair market value on the date of the decedent’s death. This is a good deal for the heir, certainly better than it would have been for the original owner (decedent), had the decedent sold the asset (in this case, stock) prior to his or her untimely demise. An example:

1. Decedent buys a share of stock for $100 (the basis) and later sells it for $125 a share. Decedent would be taxed on the $25 gain over basis.

2. Decedent who paid $100 for a share of stock dies and bequeaths the share, worth $125 on the date of his or her death, to an heir. The heir’s basis of the stock “steps up” to $125. By the way, it can also “step down”.

3. The heir, needing money, immediately sells the inherited stock for $125. Because the heir’s basis is $125, there is no gain on the sale and no tax due.

4. If the heir holds the share of stock and later sells it for $150, there is a taxable gain of $25 above the heir’s “step-up” basis of $125. Any capital gain or loss that is the result of selling inherited stock is always long-term. This rule applies regardless of how long the heir or the original owner held the stock.  Once passed to an heir, the decedent’s original basis of $100 has no bearing on the heir’s sale in either case.

This is a simplified explanation of capital gains taxation. A sale involving a capital gain can become complicated because of extraneous factors like income level, carry over and capital loss offsets, “collectible assets” which are generally taxed at 28%, the 3.8% net investment income tax thresholds, etc. So keep your CPA’s phone number handy. And fair warning, heirs should remain ever vigilant. The only deal Uncle Grabby really likes is one in his favor. At some point the aforementioned “step-up” deal could fall victim to an estate tax legislative reshuffling, and Grabby would be incredibly pleased.

Change is in the Air

Because of COVID-19 and/or the looming election, a reshuffling may be coming sooner than you think. Under current law, assets that pass directly to heirs benefit from the “step-up in basis”, which means the heir receives the asset valued as of the date of decedent’s death. If the heir should sell this holding quickly, he or she would pay little to no capital gains taxes.

According to the Tax Policy Center, the Democrat Presidential candidate proposes to tax an asset’s “unrealized appreciation” at transfer and at an ordinary income tax rate potentially as high as 39.6%. Such a hugely dramatic change would, of course, require Congressional approval.

What To Do When Your Rainy Day Fund Runs Dry
August 13, 2020

Millions of out-of-work Americans are currently struggling to pay their bills, whether it be day-to-day expenses or large, unexpected emergency outlays. What happens to folks without rainy day funds who suffer grave financial setback? In the case of the COVID-19 pandemic, Uncle Sam has offered near-term rescue packages of one sort or another. But because the pandemic keeps hanging around, many folks and small companies still remain short of funds. Then what? Who do they turn to? Often people do things out of desperation that exacerbate their financial woes… such as borrowing from retirement accounts, which disrupt carefully laid plans designed to meet long-term financial goals. Let’s explore some options for folks who find themselves in short-term financial straits.

Family Assistance

Younger, perhaps single folks often turn to parents or other family members for help. If parents are not themselves experiencing financial difficulties, it’s a sensible option… one without tax ramifications. If it’s a loan, it’s probably one with flexible repayment possibilities. More financially secure parents might even considered offering a gift to help out. But if parents themselves later become cash-strapped and apply for Medicaid, such earlier gifts or loans might need to be repaid if they fall within certain time constraints. Both parents and recipients need to keep such possibilities in mind.

Short-Term Funds

Hopefully, folks who’ve had the foresight to accumulate Rainy Day Funds did so in a manner that allows quick access to the money without penalty. Certificates of deposit often have early withdrawal penalties, and some savings and money market accounts have restrictions on withdrawals per month. Wise pre-planning can avoid such restrictions or penalties.

529 Plans

529 education savings plans are commonplace in American life, and are important tax-deferred plans by which parents save money for their children’s education. Should an unexpected financial crisis develop, families can tap into such resources – with the obvious caveat that they will lose out on tax-deferred growth. Additionally, the earnings portion of such a distribution (for non-education purposes) becomes subject not just to ordinary income tax, but in most instances, to a 10% penalty as well.

Credit Cards

The least desirable source of cash is a credit card. Cards charge extremely high interest rates and borrowing can hurt an individual’s credit score… not a desirable event when cash is short in the first place. However, for folks in desperate straits, credit card borrowing might be a viable option because down the road a negotiated settlement might be possible. But don’t count on it.

Life Insurance Policies

The cash value of permanent life insurance policies can be a source for quick cash. After all, it is your money. And a cash value withdrawal – up to your policy basis (the amount of premiums you’ve paid into the policy) – is  typically non-taxable. Amounts over the policy basis are taxed as ordinary income. And expect surrender charges. The amount of cash value available depends on the type of policy you own and the company issuing it.

If you have a sizable cash value built up in your policy, you can choose to take out a loan, often at interest rates lower than traditional bank loans. And there is no obligation to pay back the loan since it’s your money. However, any money you borrow and don’t pay back (plus interest) will be deducted from the policy’s death benefit upon your untimely demise. As a reminder, permanent life insurance policies offer both a cash value amount and a death benefit. If a policy owner doesn’t claim the cash value portion prior to death, beneficiaries only receive the death benefit. Any remaining cash value goes back to the insurance company. Policy owners should keep this in mind. Again, it’s your money.

Home Equity Loans & Lines Of Credit

Regarding home equity lines of credit, borrowers can withdraw funds as needed up to a certain amount, often at attractive floating rates of interest with generous payback terms. A home equity loan is a lump sum with a fixed rate of interest among other terms. But never forget, your home is the collateral to such a loan and is at risk if the loan is not repaid. By the way, if the loan is to help fund education expenses, any unspent proceeds are counted as family assets on a Free Application for Federal Student aid (FAFSA).

Social Security

Folks who’ve reached full retirement age and have not yet begun collecting benefits can request a lump-sum distribution of six months of benefits at once. However, there’s a big catch. By doing this, you may be giving up an even bigger retirement check from Social Security for the rest of your life. In short, the monthly benefit will decrease to what you would have received had you applied for benefits six months earlier. This source of quick cash just might be a bridge too far.

Retirement Accounts

Then there are those valuable retirement accounts. I often preach that a healthy Rainy Day Fund is critical to avoiding raids on retirement accounts. Such disruptions can have long-lasting impacts on the quality of life in retirement. However, the ability to access retirement accounts can play an important role in a family being able to handle big expenditures like higher education expenses, a down payment on a home and unexpected medical expenses such as pandemic-related adversities. As most folks know, the recent CARES Act offers pandemic-related victims additional flexibility to access IRA or workplace-related retirement plans. But recall that you pay taxes on withdrawals from tax-deferred plans, which are recoverable if the distribution is paid back within three years (be aware of the tax ramifications if a loan isn’t paid back according to the loan’s terms). Here I go again, but I would caution folks who must raid their retirement accounts to take only the minimum amount needed… not necessarily the maximum available. You’ll thank yourself later.

Fund Your Fund

This list of quick cash sources is not all-inclusive, and each individual arena of financial assistance involves additional unlisted details. But it’s nice to know in times of financial stress that certain options exist to alleviate immediate problems. Bottom line: If you don’t already have a Rainy Day Fund, start accumulating one and then complications associated with the foregoing options won’t matter.

Rainy Day Funds Redux
August 6, 2020

I know… I know… this is a re-run, but we seem to be having unexpected disasters on a routine basis so a reminder of the value of Rainy Day Funds is once more in order. Where to start?


Darks Skies Tell Tales

You’ve probably read or heard comments in the news media that most individuals/families would be hard pressed to meet an unanticipated $500 expense. I found that hard to believe until three years ago this month, when a major local disaster – the August 2017 Hurricane Harvey flood – damaged more than 200,000 homes in the Greater Houston area. This devastating event left thousands of gainfully employed people – young and old – in a major financial pickle. It compelled me to write an article that was published in my daughter’s informative website, You, Me and the Tree - “Harvey, Irma and the Importance of Rainy Day Funds”.

In the case of the Harvey flood, I recall the tens of thousands of individual Texas Gulf Coast citizens who, tragically, found themselves with flooded homes, soaked furniture, ruined automobiles, moldy clothing, and in some cases, an interrupted paycheck. Seventy-five percent of these folks were located outside the 100-year floodplain, not covered by flood insurance, and without a personal emergency fund to help restore their lives to normal. Now there are millions of folks whose jobs or businesses were disrupted because of the coronavirus that continues to devastate family incomes. The Texas state legislature has a multi-billion dollar “Economic Stabilization Fund”, a type of governmental Rainy Day Fund used for disaster relief, that helps during these times. That is helpful, but I want to talk about a different type of Rainy Day Fund over which you have total control.

Rainy Days 101

You’re just out of school. You have a new job. You finally have a steady source of income. Perhaps it’s time to put some financial order in your life. When you’re flirting with financial insecurity – living from paycheck to paycheck as many young folks do – the first order of business you should tackle is to accumulate six or so months of liquidity (cash or near cash) to meet unexpected expenses. Despite steady income, most young people on the front end of their first good job with generous benefits often can’t meet medical plan or auto insurance deductibles much less the cost of unexpected emergencies. For this reason, they should start building a Rainy Day Fund… money that’s deposited in an easily retrievable but separate bank account.

Studies Show…

According to a now bewhiskered Financial Industry Regulatory Authority (FINRA) Investor Education Foundation study, 56% of people nationally don’t have an emergency fund large enough to cover three months, much less six months of unexpected expenses – outlays such as major auto or home repairs, job loss, medical emergencies, unplanned travel expenses, etc. Sixty-four percent of Americans don't have enough cash on hand to handle a $1,000 emergency expense, let alone an uninsured flooded home (and pandemics), according to a survey by the National Foundation for Credit Counseling. Twenty-five percent of Americans don’t have a Rainy Day Fund at all. Many of these folks do, in fact, live from paycheck to paycheck, often by necessity, choosing to run the risk that no major financial disaster will uproot their lives. It’s a good bet that one week before Harvey struck, most southeast Texas citizens barely gave the tropical depression in the southern Gulf a second thought. I suspect the same held true nationally with regard to the pandemic. Its fury was slower in developing, but nastier in its endurance.

Without an Umbrella

So, what happens when individuals or families without Rainy Day Funds suffer a financial setback? In the case of the pandemic, Uncle Sam came to the near-term rescue to one extent or another, but many people have been left short of funds. Then what? They borrow from family or friends. They neglect to pay other bills. They sell or pawn other assets. They get a cash advance from a credit card company. They mostly do things that simply exacerbate their financial woes. This is why I call a Rainy Day Fund a financial firewall. In addition to helping meet those unexpected expenses, a Rainy Day Fund helps avoid disruptions in meeting the goals of a long-term financial plan.

Where to Start?

How does one begin the process of building a Rainy Day Fund? First, don’t set initial emergency fund goals so high that you soon deem them unrealistic or unattainable. A $100 or $1,000 fund is better than nothing, and when you hit that mark, strive for $200 or $2,000… then $300 or $3,000, etc.

To protect yourself against the possibility of a major emergency, develop a working relationship with your local banker and establish a meaningful line of credit. Money that could be borrowed in case of a financial emergency. And in that instance, use your smaller Rainy Day Fund to supplement the line of credit.

Spare Change

Where do you find the money to start your Rainy Day Fund? As potential sources, reduce or eliminate spending on non-essential goods and services while building your nest egg. Use spare change – dimes, quarters, and dollars – or an unexpected salary increase, a tax refund, or a few restaurant meals foregone (easier to do these days). You might even have that bank mentioned above automatically shift a small amount of money ($25-$100) from your checking to your emergency account each month. After a month or two of shifting, you might not notice the difference, and it adds up quickly!

Convenient, But Not

In getting started, ensure that basic day-to-day needs are met to avoid discouragement during the accumulation process. And be wise, keep your emergency funds in a separate account – one less accessible than your regular checking or savings accounts. And DO NOT carry a debit card tied to that account. Make it a bit inconvenient to access these funds. In short, make the account accessible, but not too accessible. Force yourself to consider your actions before making a withdrawal. Accept the fact that all of us lack a bit of monetary self-discipline from time to time. In short, your Rainy Day Fund is a relatively accessible stash of cash for use only in case of emergency. Don’t use it to buy an automobile or computer. Don’t buy a new piece of furniture or remodel your kitchen with it, unless, of course, your home flooded in southeast Texas back in 2017.

Generous Neighbors

America is well-stocked with numerous Fortune 500 companies and a population of folks with big hearts in times of great stress. In addition to friends and neighbors, companies large and small came to the aid of Harvey victims and are doing so as well with COVID-19 victims – supplying employees with temporary housing, food supplies, interest-free loans, grants, and volunteer cleanup crews, in addition to counseling and employee time off (or the opportunity to work from home) to take care of family needs.  

It Could Be You

To drive this need for a Rainy Day Fund home, in December 2018 the federal government halted the function of many of its agencies due to a budget impasse. Some 800,000 federal workers and service providers with very secure jobs missed a paycheck or two. As is typical of government shut-downs, those workers later received the missed paychecks, accrued sick and vacation time and their pensions were calculated as if they had been on the job during the shutdown. Still, according to news reports, many of those government workers quickly began to experience all kinds of financial chaos. In short, despite holding very secure positions with the federal government, many of them could not handle even this short-term financial disruption in their lives.

Simply put, major floods, government budget impasses and pandemics are not predictable events. A Rainy Day Fund is your first step toward both short- and long-term financial security. It also serves as a firewall protecting your long-term plan from short-term financial chaos.

To Contribute or Not? That Is the 401(k) Question
July 30, 2020

Those who routinely read my blogs (both of you) know that I frequently encourage folks to optimize their 401(k) match opportunities. And I believe it’s incredibly good advice. Think of it this way. For those “specific” dollars your employer matches, you receive FREE MONEY - a 100% return on your investment. Yes, I know, a less than dollar-for-dollar match is the more standard match, reducing that 100% return, but I think you get the gist of what I’m saying.  


Why Not?

Question is, why not?

If you qualify for an employer match, it provides a great retirement savings advantage over those employees who forego or aren’t blessed with the opportunity to participate in a matching  program. But a lot of people do not participate for varying reasons. Quite a lot of folks work for companies that don’t offer a 401(k) plan. And many companies don’t allow new employees to participate during varying lengths of probation. Still other employees are eligible to participate but choose not to. In fact, studies indicate that a third or more of eligible employees simply opt not to contribute to their employer’s 401(k) plan.

For answers, I go to Vanguard, my low-cost investment advisor of choice that manages thousands of 401(k) plans for employers. They publish detailed information annually in their How America Saves report using data from millions of plans to provide an understanding of why certain employees don’t participate in available plans. By the way, Vanguard is low cost because the company is owned by its shareholder-owned funds (no outside investors other than those shareholders).

Lost Time

Most large employers offer a match to their plans. Only about a half of smaller employers do. The fact that some employers don’t offer a match is often misunderstood by new employees to mean “contribute only if the employer offers a match”. Don’t make this mistake. This can lead to valuable time lost NOT contributing to a retirement plan in the interim. And as you know, lost time equals money not compounding in future months and years. But as mentioned above, even when an employer offers a match, not all new employees are immediately eligible to participate. Many plans – up to 40% of both large and small employers – require a year of service (probation, if you will) before receiving the employer match opportunity. Mark your calendar. When probation ends, hop aboard the FREE MONEY train.


And there’s that other pickle. Even after an employee becomes eligible and chooses to match, employers frequently require that new hires remain with the company for a period of time before the match becomes the employee’s to keep… called vesting. That’s right, only around 40% of “large plan” employees are eligible to retain the match at the point of receipt. Those who depart the company within a particular timeframe stand to lose part or all of the match. Smaller companies are more generous. Competition, I suppose, dictates that upwards of 70% of employees in “small company plans” retain their match from the point of eligibility.

Low Income Factor

If a plan offers no match at all… or if there is a waiting period… or if all or some portion of the match might be forfeited, such factors DO impact the participation rate. In fact, they encourage many employees not to participate in their company’s 401(k) at all. Still, in many cases, these may not be the primary reasons for non-participation. Like so many other things in life, matching is a dollars and cents exercise. Consider for a moment an employee’s financial ability to participate in a plan.

With both large and small 401(k) plans, participation rates increase along with employees’ salaries. No surprise here. Conversely, the lower the income, the lower the participation rate. When a family breadwinner needs every penny of income to provide for life’s necessities, that employee simply can’t afford to contribute to a 401(k) even in the presence of generous matching rules. Under normal circumstances, higher-income workers go out of their way to collect every penny of an employer match. Lower-income folks, those with the greatest need for financial assistance, often leave this FREE MONEY on the table. Unfortunately, losing out on a 401(k) match is only one of many hurdles facing them. It’s expensive to be poor.


Failure to take advantage of matching plans makes sense only in the affordability instance. Otherwise, to not participate borders on imprudence. It truly is FREE MONEY… truly a 100% return on those “matched” dollars. And if affordable, eligible employees should start contributing to their employer’s 401(k) plan on day one of employment. Don’t wait until becoming eligible for matching (if a waiting period is involved). Those unmatched contributions add up and their yields compound, too.

You’ll be glad you did.

How to Optimize Retirement Spending During COVID-19
July 23, 2020

The enduring COVID-19 pandemic has retirees (or those nearing retirement) taking a second look at their “buckets of funds” – sources of cash for spending during the next 20-30 years. In all likelihood, folks will spend their more secure and predictable forms of income to pay for food, utilities, medical care, mortgage payments, etc. – and their less predictable streams of funds will be used to cover more discretionary types of outlays.  


Income Buckets

Retirees might view the secure bucket as paycheck replacements and the less secure bucket as holiday bonus replacements, or “sell-if-you-must” sources of cash. Nothing new here except, perhaps, a bit of belt-tightening until COVID-19’s dark cloud wanes. In short, a wise spending strategy in pre- or post-retirement necessarily includes two primary buckets of retirement income: (1) a sufficient amount of guaranteed income to cover life’s routine necessities, and (2) a cache of equities/bonds/real estate from which to draw funds to meet more occasional or unexpected outlays. Liquidity is the key element of the latter bucket; thus, it should include a “Rainy Day Fund” as a protective firewall against having to prematurely raid other portions of the second bucket stemming from unavoidable market decline.  

Comfort in Numbers

IRAs, 401(k)s, and the like have made remarkable recoveries from the depths of the initial COVID-19 train wreck – as of July 22, 2020, the Dow was up 41% and the S&P 500 was up 49% from their March 23 lows. However, this rattling experience has planted seeds of worry in the minds of those in or near retirement. In previous blogs, I’ve nibbled around the edges of various cash sources, discussing how they might be viewed during an individual’s later years. Those “first bucket” sources of income (i.e., Social Security, annuities, and/or pension payments) provide familiar comfort in the form of regular bank deposits. That “second bucket” of retirement income – stocks, mutual funds, real estate, etc. – suggests a less regular flow of funds, impacted occasionally by an ever-volatile marketplace.

By the way, annuities provide protection against unusual longevity but come with significant inflation risk, reduced portfolio flexibility, and less “trickle down” for heirs. Delaying Social Security can provide similar protection with fewer negatives and offer those delightful inflation adjustments. In my rather biased view, an annuity makes sense only if a retiree is 70-plus and still seeks protection against longevity.

The SS Delay

Let’s delve further into Social Security. A common recommendation retirees hear is to delay taking Social Security beyond normal retirement age. If a prospective retiree decides to follow this advice, another source of income should be set aside to fund the near-term income vacuum the delay creates. For example, if a delay to age 70 takes $100,000 out of an individual’s near-term income picture, $100,000 should be set aside from the remaining portfolio and placed in a safe account (perhaps a treasury bond fund) to replace those delayed Social Security checks. And for the resultant balance of the portfolio, a recalculation of the spending amount using a lower rate of annual spending (e.g., 3.5% vs 4%) based on one’s age should be considered. Adjustments to ANY spending strategy should be modified by expectations of a long or short longevity, high or low real interest rates and market value expectations, and how much (or little) a retirement portfolio holds of “market risk equities” versus “inflation-adjusted income”. Guestimates all, no doubt, but necessary.

Asset Allocation

A common question posed by my subscribers is, “In the few years before and then during retirement, what is the best allocation for a retirement portfolio?” I have an opinion, which is just that - an opinion. It first assumes setting aside funds to fill any Social Security delay until age 70. After age 60, I lean heavily toward an allocation much like Vanguard’s Target Retirement Income Fund (VTINX)… approximately 30% stock funds and 70% bond funds, which includes a 12% portion in international stocks and 16% in international bonds. It also includes roughly 17% of short-term inflation-protected securities that cozies up nicely with those inflation-adjusted Social Security checks, whether or not delayed. Folks who fret excessively about inflation (like me) might wish to go heavier on stock index funds. Those less concerned about Izzy The Inflation Monster might consider a higher percentage of bonds or a total bond fund (the latter would certainly not be my cup of tea). My own bottom line allocation reflects those oft-mentioned PDQ Principles: Quality (including equities with low annual operating expenses); Diversification (a fund of funds including international assets); and, of course, a big dab of Patience.

To Have or Have Not

“What about insurance?” subscribers ask. If you are retired and without dependents, why keep paying for life insurance? One obvious situation might warrant it. If you’re married and most of your retirement income is pension-related with minimal survivor benefits, then yes, life insurance would be in order. And health insurance is absolutely necessary, particularly if retiring early (prior to Medicare eligibility). Liability insurance (perhaps an umbrella policy) seems appropriate given most retirees’ total dependency on their remaining assets. Disability insurance in retirement seems unnecessary. Long-term care insurance… who the hell knows. To NOT have it leaves one vulnerable to a catastrophic healthcare event. To have it exposes one to big premium adjustments. I’ll punt on that one.

Passive Investing: Beat the Aggressors at Their Own Game
July 16, 2020

I dug this week’s blog topic out of the archive because it focuses on important points of why passive investing is a good approach for smaller investors – particularly those who deliberately choose not to spend much time with their investment portfolios. There are compelling reasons for folks who dare to be average to consider index fund investing: simplicity, low-cost, good quality, diversification, and year-after-year yields approaching that of the broad market. The results speak for themselves compared to a more active management approach.

Don't Worry, Be Passive

For years, I’ve been beating the drum about investing in index funds (called passive investing) and caterwauling about “daring to be average”. Well, in the last decade or so, it has become quite the rage… not because of my caterwauling, but because it simply makes sense to investors who wish not to spend much time fussing with their retirement accounts. Passive investing has stood the test of time by consistently outperforming most active fund managers who – bless ‘em – go to extraordinary lengths researching companies to determine where to place client dollars. Some are good at it… some are less proficient. In any case, extensive research is expensive to conduct and is a cost the investor ultimately absorbs.

Beating the Big Boys

A while back, I read a Wall Street Journal article about a fellow out in Nevada named Steve Edmundson, the investment chief of the Nevada Public Employees’ Retirement System who, all by his lonesome, out-performs many pension funds staffed by hundreds of employees. What’s his secret? He invests in low-cost funds that mimic indexes. A more recent WSJ article noted that Steve managed $35 billion or so in passive funds whose yields as of June 30, 2019, for one-year (8.5% vs 6.7%), five-year (7.1% vs 5.5%), and 10-year (9.9% vs 9.1%) periods beat one of the nation’s largest public pensions, Calpers, that hires hundreds of people to invest hundreds of billions of dollars. Edmundson’s minimalist approach is based on the simple concept of “reducing the complexity, risk, and costs of a portfolio”.

Let 'Er Ride

Another more well-known fellow, multi-billionaire Warren Buffett (often called the Oracle of Omaha… the so-called greatest living investor) is also an adherent of the passive investment approach despite his Berkshire Hathaway follies (humor). Rumor is that he instructed the executors of his sizable estate to “put 10% in short-term bonds and 90% in a low-cost S&P 500 index fund and "let ‘er ride.” In short, the Oracle advised his executors to avoid the high-cost financial geniuses (Wazoos, I call ‘em) and instead, dare to be average with his piddling (more humor) estate.

The Danoff Effect

Of course, no single investment strategy is perfect – or without risk – but some tend to perform better than others over time. And there are some highly competent active managers out there. Take Will Danoff, the manager of Fidelity Investments’ huge Contrafund. Since 1990 and through October 2016, Danoff outperformed the S&P 500 Index by 2.9% per year (sources: Morningstar, Inc., and the WSJ). If you had hooked up with Danoff and invested $10,000 in 1990, you would have has around $230,000 in your account in 2016. For comparative purposes, the same $10,000 invested in an S&P 500 Index Fund would have topped out at $118,000 over the same period. During that period, Danoff was about as close to a sure thing as there was – but of course, there are no sure things. Problem is, locating the Danoffs of the world while they’re on a hot streak is a matter of good luck rather than skill.

Studies Show…

Studies show that passive (index) funds do outperform most active fund managers, but it’s not the 90% outperformance stat you often hear. Sixty percent would be more like it on average… higher in good times, lower in bad times. In short, active managers seem to do a fairly good job of preserving capital in bad times while passive funds tend to outperform active managers in both bad and good times. Why is that? Well, passive funds give investors a jump start on actively-managed funds because they are cheaper to own (lower annual expense ratios) and are more tax efficient due to less trading.

Passive investing is not for everyone, but it sure fits this old duck. I like those low annual operating expense ratios and the tax advantages associated with less turnover versus active management costs. And like Steve Edmundson out there in Nevada, I don’t need co-workers. All I need on my desk is a uniball pen, a stapler, and a $3 calculator (okay, so I overpaid). Oh, by the way, I also avoid watching CNBC and those other frenzied cable news network programs. Used to watch Fox on Saturday morning until the network dropped those four consecutive 30-minute taking-head shows and turned the time over to Cavuto. Two hours of “thank you very, very much “ of Cavuto can wear on a man.

Harvard's Embarassment

And to make my point about over-paid Wazoos, in a 2016 article by Nicholas Vardy titled “How The Nevada State Pension Fund Is Embarrassing Harvard," he noted that Edmundson earned $121,121 managing the Nevada fund in 2015 while Harvard Endowment’s ex-CEO knocked down $13.8 million… yep, $13.8 million… the year before. Edmundson’s Nevada Pension fund was roughly equivalent to Harvard’s endowment, then about $35 billion. Nine years after reaching its $35 billion peak in 2007, the Harvard endowment remained stuck in that same range. Yeah, we’re talking old news here, but it tells the tale.

Near Perfect

In summary, I, like most index adherents, believe that the stock market is an extremely efficient mechanism for properly valuing the worth of index fund companies over time. Think of it this way. Millions of very smart folks collectively gather all the information there is to know about publicly-traded companies and their prospects. This consensus of opinions quickly adjusts valuations based on constantly changing variables.

This consensus of opinions isn’t perfect, but by golly is it hard to outwit! And by investing in index funds, I don’t have to pay for it.

IRS UPDATE: You Can Refund Your RMD if You Want To
July 9, 2020

Everytime you blink our government is (temporarily) changing a rule or guideline in order to ease the financial burden on Americans during the COVID-19 pandemic. Don't get me wrong, I am happy they are making these moves, but you have to be paying attention to news sources 24/7 to keep up. Blink - and you might miss it.


Required Minimum Distributions "Refund"

Among the important provisions of the Coronavirus-related CARES Act were waivers for certain 2020 Required Minimum Distributions (RMDs). Retirees with withdrawals due in 2020 from their 401(k), 403(b) or an IRA all qualified for waivers (as did their beneficiaries). And, yes, the waiver included those who turned age 70½ in 2019 and had to take their first RMD by April 1, 2020.

UPDATE: On June 23, the  Internal Revenue Service (IRS) issued a notice that folks who wished to return any or all Required Minimum Distributions (RMDs) taken in 2020 could do so by meeting an August 31 deadline. This is very important for those who blinked and did not know about the CARES waiver, and took an RMD in early 2020 before the pandemic wrought havoc on our country.

RMD Rewind

To rehash, many retirees contribute pre-tax income to tax-deferred 401(k), IRA, and other individual retirement accounts. The federal government REQUIRES these investors to begin withdrawing (and paying tax on) a set percentage of their account balance starting at age 70½ (for those born before July 1, 1949) or at age 72 (for those born after June 30, 1949). Such withdrawals are called Required Minimum Distributions. In April 2020, the IRS announced that folks who took RMDs between February 1 and May 15 of 2020 could put the money back in those accounts by July 15, but the option was off-limits to folks who withdrew RMDs in January 2020. That has since changed.

Real-Life Example

To illustrate, let’s assume an investor took a $10,000 RMD out in January 2020 and directed his/her custodian to withhold 20% or $2,000 for taxes. Under the second IRS action, the investor could return the net-of-tax $8,000 to his/her tax-deferred account and make up the $2,000 difference (the withheld taxes) out-of-pocket. To ultimately recover the taxes, the investor could reduce his/her 2020 quarterly estimated tax payments or await a refund on his/her 2020 return. A popular alternative considered by some is to let Uncle Sam keep the $2,000 tax portion and by the August 31 deadline convert the $8,000 balance to a Roth IRA… allowing this portion of RMDs to grow tax-free until death do you part. After conversion, Roth account owners are exempt from RMDs, but beneficiaries who inherit them are not.

By the way, if you had taken 2020 RMDs in monthly installments, you can return all of those net-of-tax distributions back into the tax-deferred account from which they came. In fact, you can even deposit the money in another tax-deferred account of your choosing. And this new relief covers everyone from account owners who had rolled over funds from one IRA to another within the past 365 days to beneficiaries (including spouses and children) to folks who turned 70½ in 2019 but who delayed taking their first RMD until 2020. But as mentioned above, the deadline to do a Roth conversion or to return RMDs taken in 2020 is August 31.

Back on Track

As you may recall, the purpose of the initial IRS action (as well as the revision) was to help older Americans avoid selling portions of their retirement account balances at vastly reduced values to meet 2020 RMDs – and hopefully buy time for their account balances to recover from the early 2020 COVID decimation. So far, the S&P 500 recovery has been remarkable… from a Feb. 19 high of 3,386 to a March 23 low of 2,237 (a loss of 33.93%) back to a July 6 close of 3,169 (a gain of 41.66%)… but still a net loss of 6.41% from the February low. In any event, a dramatic recovery from the nerve-wracking February to March decline of 33.93%.

Investors Have Been Brave During this Pandemic
July 2, 2020

That pesky COVID-19 virus has caused many folks, young and old, to take a second look at their investment plans. The resultant volatile, free-wheeling, bear market can create a lot of doubt in people’s minds about what to do or what not to do. But, by and large, people kept the faith.


Shocking Stats

In the first four month of 2020, less than 1% of Vanguard’s five million 401(k) and other retirement plan investors moved their money out of stocks. And almost 95% of those same patient investors didn’t make a single trade. T. Rowe Price revealed similar investor experiences from late February through March. Less than 3% of their 2.2 million retirement plan participants made any changes to their portfolios. So far, people have hung tough despite the pandemic, but it never hurts to review the basics of personal finance. And as usual, we’ll take dead aim at the youngsters among us.

Be Brave

Start saving early. The Amazing Power of Compounding is one of the most powerful long-term tools an investor has… a function of time and patience, given a reliable stream of investment dollars to deal with. The earlier an individual starts to save and invest, the easier it is to reach, say, a million-dollar goal. Start saving $500 per month at age 25. Invest for 42 years in assets yielding 6% per annum, compounded annually.  Using a Bankrate investment calculator, after 42 years, your balance will be roughly $1,084,000 (before inflation and taxes). Change the starting age of investing to 35. All other things being equal, and your balance after 32 years would be approximately one-half…about $560,200…due to this unfortunate 10-year procrastination. Time is the key!

Be Bold

If possible, invest 15% of your paycheck (including any employer match) monthly to optimize your compound growth in later years.

Always… always… invest the amount necessary to snare the maximum employer match. Why? This FREE MONEY will greatly enhance the yield on your investment in a 401(k).

While young, be bold, invest for growth. Though riskier, equities (stocks and stock funds) traditionally outperform bonds or cash. Manage that higher risk by investing in highly diversified, low-cost index funds.

Be Balanced

As retirement approaches, rebalance periodically. During those younger years, with a higher allocation in equities, an investor’s portfolio has more time to recover from an untimely market correction. As retirement approaches, rebalancing – perhaps annually – ensures a reallocation of stocks, bonds and cash that is in keeping with one’s more conservative investment plan.

Then Give Up Control

It’s not uncommon for even the most conscientious among us to shy away from making our own investment decisions. This shyness includes what kinds of securities to buy and when and how often to rebalance portfolios. Consequently, more and more folks are shifting to index fund investing, and more specifically, to target-date “fund of funds” investing. The latter simply involves allowing a team of professionals decide for you what diversified array of securities to buy and when. Specifically, the fund managers select your overall mix of stocks, bonds, and cash – a mixture that increasingly shifts to bonds (i.e., becomes more conservative… less volatile) in retirement or as retirement nears.

When, Why and How to Rebalance Your Portfolio
June 25, 2020

The COVID-19 pandemic has reminded investors of the value of rebalancing portfolios. Because of my age, I’ve paid more attention recently to portfolio reallocation. People approaching retirement – certainly, retirees – should be more inclined to rebalancing from equities to bonds. For most of my life I’ve fretted more about inflation than rebalancing, but age has a way of redirecting one’s thinking.


Why Rebalance?

History shows that redeploying equities into bonds does, in fact, contribute to tempering a portfolio’s volatility. But there are other reasons for rebalancing, too… reasons aside from volatility (risk) reduction. Folks already in retirement might need to convert stock into cash to meet increased living expenses. This accomplishes two purposes: volatility reduction AND cash flow enhancement. Younger investors might derive certain benefits by increasing risk via adjustments in equity shifting within their own asset groups (growth to value, domestic to international, dividend chasing, etc.).

Flirting With Rebalancing

Those wild inflation years in the late 70’s and early 80’s instilled in me a cautious nature regarding the erosion of purchasing power. I knew that rebalancing could deliver multiple benefits, but I put it off… still do to a certain extent. Face it, the stock market has been a good place to be since the mid-1980s, and there is a natural aversion to monkeying with a positive trend. I also debated about what a proper portfolio balance might be at given points in time – and whether the rebalancing effort might trigger unnecessary tax events, reducing net yield over time. Most of my early rebalancing efforts were within my own portfolio’s asset groups… small-value to mid- or large-, value to growth and back, individual stocks to funds (mostly index), but truth be told, most of my shifting was from individual stocks to low-cost mutual funds to gain diversification. These are all legitimate rebalancing choices and can reduce risk and enhance portfolio yield.

Where To Start

If, like me, you’ve been flirting with rebalancing but just aren’t certain when or where to start, here are some things to consider. Start with what’s motivating you to even consider rebalancing in the first place. Is it because retirement is at hand and risk reduction is of major concern? Are you worried about today’s generous market valuations? Has the market’s recent volatility given you more heartburn than usual? Perhaps, then, a movement from stocks to bonds is the right strategy for you – a reallocation that will likely reduce risk but NOT necessarily enhance returns. Over time, a stock-heavy portfolio traditionally outperforms one emphasizing bonds.

After considering your primary motivation for rebalancing, take a hard look at your existing portfolio (including real estate) and your stage in life. If you’re a new retiree with a portfolio heavy in equities, you are particularly vulnerable to a market decline. That comforting paycheck is gone but spending for day-to-day necessities remains a part of life. There is no worse time to experience a bear market… and no better time to comfortably shift more equities to bonds and cash (that Rainy Day fund) and to appreciate that inflation-adjusted Social Security check. If you’re still a bit light on day-to-day cash, this also might be a good time to convert a portion of those equities into an annuity – but use prudence about those non-inflation adjusting annuities. If you’ve been a reliable saver, Required Minimum Distributions (RMDs) are very much a part of your future, but if possible, don’t tap them until “required” (age 72). Avoid early draw downs of any source of capital… a key to your portfolio’s sustainability. Remember, it’s not uncommon to spend two or three decades in retirement.

Target-Date Funds

By the way, if you’re like me and tend to procrastinate about rebalancing your portfolio, don’t forget the previously mentioned Target-Date Funds for all ages – funds that automatically rebalance across the years (until they match the Target Retirement Income Fund allocation). I’m not suggesting that you go whole-hog into target-date funds, but their presence in a portfolio will provide some comfort despite a malingering nature. For younger investors, low-cost, highly diversified target-date funds invest heavily in domestic and international stock funds and give lighter weight to domestic and international bond funds. As the years go by, those positions gradually reverse. I joined the target-date crowd later in life as my inflation-neurosis calmed a bit in the face of my ever shorter time horizon. With some target-date funds in hand, I now feel more at ease with chaotic markets.  


It’s important that an investor have a meaningful blueprint by which to measure his or her investment successes, particularly when engaging in routine rebalancing. Comparisons to a benchmark will provide you with a better feel for what kind of rebalancing has worked for you over time. Since my primary objective to keep things simple – and because my portfolio is built around index funds – my benchmark is the S&P 500. Simple, yes, but a gauge that works for me.


Rebalancing necessarily involves buying and selling securities of one sort or another – activities  that can lead to tax consequences. Accordingly, it makes sense to rebalance to the extent practicable within your tax-sheltered retirement accounts. For example, in an IRA brimming with low-cost Vanguard products, two things are avoidable: taxable events and high transaction costs. The same might be said for an employer’s 401(k) or 403(b) retirement vehicle, except fees tend to be a bit higher.

As to those taxable accounts, if yours is equity-heavy – and retirement is on the horizon – in lieu of triggering a tax bill explore the possibility of investing monthly contributions in underweighted (i.e., bonds) areas. If retirement is at hand, follow the “specific identification method” of selling winners… simply earmark your high-cost-basis units for sale versus the lower-cost-basis units… an effective way of minimizing capital gains.

Retirees 'n Rebalancing

Rebalancing an individual’s portfolio from stock to bonds – particularly in or near retirement – is clearly a risk reducer but is less rewarding from a yield perspective. Stocks tend to be more volatile and routinely outperform bonds. But stage in life is important when considering rebalancing. Typically, younger investors worry less about controlling risk. Because time is on their side, generating higher returns take precedence… and rebalancing takes a back seat.

I recall those years of making routine contributions to retirement accounts heavily weighted with equities. Volatile markets bothered me less than low yielding investments. And I must admit  that this practice of not rebalancing can become a habit in the pursuit of higher yields… even in retirement. So, let me emphasize the importance of rebalancing as retirement nears. With less time for recovery from major market declines, risk reduction becomes increasingly important – more so than in those early years of asset accumulation. And as mentioned earlier, rebalancing can help with cash flow sourcing, diversification, tax avoidance, and if you’re so inclined, charitable giving. Give it some thought.

Investing - like life - does not have to be complicated.
June 18, 2020

Subscribers tend to come and go, but during Wynnsights' first year the blog retained 96% of its subscribers. Although some subscribers are routine readers, and some are not – we all lead busy lives – I appreciate the fact that most of you have stayed in touch. What concerns me are those nonsubscribers who tend to come and go and may have missed details of some of the principles I admire. I suspect these “quiet” followers join us with less regularity than subscribers who likely are more familiar with my PDQ Principles of Investing… Patience, Diversification and Quality. Without question, I’m a John Bogle proponent (he’s gone now but his commonsense books on investing remain), and I fear that many of the blog’s occasional readers might have missed some of my year-old comments that preached Bogleisms.

I’m going to take another shot at ‘em in today’s remarks, hoping “the silent ones” are checking in. If so, they’ll hear another Bogleism sermon. It’ll be short and sweet but to the point because Bogle’s principles are the foundation for and embedded in my own PDQ principles. And a good place to rehash old news is to start at the beginning: The development of a simple investment plan.


The Plan

Without an investment plan… a savings strategy if you will… you’re sort of flapping in the breeze. The plan needs to be simple… and followed. Otherwise, why bother? In order to effectively use this plan, an individual should save on a routine basis. And then, as Bogle would advise, “Buy Right And Hold Tight”.  The time to start would be soon after nailing down that first real job. The place to start would involve buying an index fund around which to build a long-term portfolio. That’s right, make quality investments and keep them. If you don’t make informed investments, you’re just another ill-prepared investor chasing the latest rumor – essentially practicing  the strategy of buying high and selling low.

Quality And Diversification

My own search for quality led me to John Bogle.  

The “Bogleism” that really impressed me involved his own pursuit of quality and his sound advice: “Forget The Needle, Buy The Haystack”. Advice that involves both attraction and avoidance – the attraction of investors to mutual funds in general (and index funds specifically) while at the same time avoiding the purchase of individual stocks… the killing of two birds with one stone shall we say. And, yes, I’ll continue to mention ad nauseum that index funds consistently outperform most actively managed funds as well as other investment strategies. Why, you ask? In large part because index funds save investors billions of dollars in fees, which reminds me of another Bogleism: “Minimize Costs”. During a 35-40 year working career, cost minimization will result in additional tens of thousands of dollars in your retirement fund. Reminds me of another Bogleism: “Investors not only don't get what they pay for, they get precisely what they don't pay for." In short, every dollar you save by investing in a low-cost, unmanaged index fund is a dollar of return that benefits you, not some Wazoo.

Avoid The Wazoos

In other words, avoid the Wazoos. Investment fees matter – a lot – as do those taxes generated by Wazoos who manage high turnover funds. Be as ruthless as you can in minimizing fees. Be an investor, not a gambler. Make quality purchases and fall in love with them… such that if you have to hold them through several lengthy bear markets, you won’t mind. I call this index fund methodology “Daring To Be Average”. It involves being realistic about your long-term expectations of investment earnings. Be satisfied with earning “just the market average”. Over the long haul, you’ll end up more successful than most by doing so. Let “time” (compounding) instead of “timing” (inappropriate risk-taking) be your friend.

Patience And Compounding

Speaking of being patient with quality investments, another Bogleism rears its head: “Time Is Your Friend; Impulse Is Your Enemy”. It brings to mind the true value of patient investing and the benefits of The Amazing Power of Compounding. Patience opens two major avenues of benefits: that of compounding and of not flushing in highly volatile markets. No herd instinct for you. Stay the course as insinuated above in “Buying Right And Holding Tight”. One of my favorite Bogleisms is “Hedgehog Beats The Fox”,  an effective thought process I employ in times of excess market volatility. I simply imagine rolling myself into a spiny ball and ignoring the foxes… those Wazoos… while patiently holding my low-cost, high-quality, well-diversified index funds. It’s not a pretty sight, but it works.

Manage Risk

In the final analysis, there’s no avoiding risk in the marketplace. All of us must constantly weigh the risk of loss against the risk of not reaching our investment goals: creating a comfortable life; sending kids to college; developing a low-stress financial retirement nest egg, etc. Managing risk is the key. Exercising patience… controlling emotions… time spent in, not timing of the market… all the while,  keeping things simple. Most of us don’t need the Wazoos and their costly, complex strategies. And it’s been my experience to ignore what they do during those volatile markets we all experience from time to time.

Rainy Days

A predicate of this simple approach to investing is that all-important “Rainy Day Fund”; a stash of cash set aside to cover the inevitable financial emergencies – events such as employment interruption, medical emergencies, auto or home repairs, etc. – and to provide a financial firewall to protect one’s long-term investment portfolio. Rainy Day funds help avoid borrowing money against 401(k)s or IRAs, loans, which too often are not paid back with long-lasting impact on life after retirement.


In summary, develop a simple plan, stick with it, and start saving and investing early (which will allow you to enjoy the amazing power of compounding); buy and hold low-cost, high-quality, well-diversified investments; avoid making impulsive decisions; and ignore the machinations of the so-called experts. They tend to flush on a whim, often advising others to do the same. Be Patient… Be Diversified… Buy Quality… and you’ll likely enjoy a low-stress financial life before and during retirement.

Forget the Rumors. Social Security is a Good Asset
June 11, 2020

Can your Social Security stream of income (let’s call it SSSI) be viewed as a bond in your asset allocation? One camp argues no because it cannot be sold. The other camp argues yes because it provides a predictable “bond-like” income stream. The way I see it, your SSSI is a valued asset regardless of its salability... with caveats, of course. Its fixed-income feature does in fact give it a very bond-like shine despite its inflation-adjusted attributes. Point is, why argue the point? What the hell difference does it make? Social Security is what it is – and admittedly, a rather valuable and unique asset. Many investors do, in fact, stick it on their balance sheet at some calculated present value as if it was a bond. But such a calculation has validity only so long as the individual is alive and is only as valid as the “rate of interest” applied to its income stream. You might conclude that it’s an individual sort of thing.

The Good. The Bad.

It is an individual thing because its meaningfulness to you depends a great deal upon what other assets you have in your retirement portfolio. A huge plus-factor is that your Social Security income stream is inflation-adjusted, meaning it will hold its value… its purchasing power… as long as you live. Another relevant – but in this case, negative – factor is that when you and your spouse depart this life, it, too, disappears, making it an inconsequential asset to heirs. And another negative is its susceptibility to political uncertainties, meaning that the Social Security Trust Fund is nearing depletion. But intense political pressure by the AARP crowd will likely resolve that issue. In my mind, to most SSSI recipients, these negatives are offset by some significant positives – that this stream of income is not subject to market risk, nor is it influenced by what is happening in the interest rate world – or by the quality of the issuer of bonds an investor might otherwise choose to own.

SSSI as a Bond

If you’re terribly concerned about viewing SSSI as a bond – or not – then set it aside when determining your “proper” asset allocation and net portfolio annual spending requirement. This will enable you to make portfolio-related decisions without cluttering up the “net required spending” (3%?… 4%?... 5%? per annum) from your portfolio. No doubt, there is a lot of difference between a stream of income with a calculated present value of say… $350,000… as opposed to having bonds with a collective redeemable value of $350,000 in your retirement account. If you should need to raise a large sum of money quickly, bonds would no doubt better fit that dilemma than your Social Security stream of income. Alternatively, if you need the comfort of knowing that a portion of your retirement portfolio is not being eroded by Izzy The Inflation Monster, your SSSI should provide a certain measure of such solace.

Peace of Mind

In the real world, SSSI is an inflation-adjusted, guaranteed stream of income that will continue throughout your life – but not beyond the life of you and your spouse (child benefits notwithstanding). Except for the most recent government check in hand, SSSI’s guaranteed  revenue stream is essentially illiquid. It cannot be sold, and it is subject to political risk. Facts, all. But by viewing SSSI as simply a “bond” in your portfolio, you’re overlooking some of its unique and very comforting characteristics. In a nasty bear market like the current COVID-19 mess, families in retirement with one… often two… social security checks in their portfolio are much less exposed to the stock portion of their portfolio than those without inflation-adjusted income streams. Being reminded of this fact might bring you some peace of mind that, heretofore, you haven’t bothered to enjoy.

COVID-19: Delaying Social Security…Good Advice???

Folks nearing retirement are often advised to delay taking Social Security in an effort to enhance future benefits. Some calculate that this delay can increase benefits by an estimated 8% for each year a retiree waits past full retirement age (the age at which a person may first become entitled to full or unreduced retirement benefits) to take them. Such credits accumulated by waiting no longer accrue beyond age 70. In normal times, this well-intended advice will, in fact, result in a guaranteed balance-of-life benefit – one that can even carry over to a surviving spouse if that spouse isn't claiming benefits on his or her own work record.

Compared to today's anemic returns on cash and investment-grade bonds, that 8% is a tough yield to beat. But is the advice to delay taking Social Security is still sound amid the chaos of the current COVID-19 crisis and the accompanying market drop that has so devastated investor portfolios. Face it, most portfolios aren't as robust as they were three months ago (despite recent recoveries). Not surprisingly, investors on the verge of retirement likely find themselves with slimmer retirement assets. Those caught holding inadequate “rainy day” funds to meet current cash needs might wish not to delay taking Social Security, thus buying time for their portfolios to “heal”. Just a thought.


Healthcare FSAs vs. Health Savings Accounts. What's the Diff?
June 4, 2020

My apologies for this rather wordy blog, but for those who might qualify for a Health Savings Account (HSA) and who are searching for beneficial tax-deferred retirement vehicles, it just might be worth your while to read. To watch the video, click here.

HSA vs. Healthcare FSA

Our discussion last week about healthcare Flexible Spending Accounts (FSAs) spurred some queries about a related subject, Health Savings Accounts (HSAs). Are they one and the same? Because HSAs are frequently confused with FSAs, let’s briefly discuss the major differences.

Although both are tax-advantaged accounts for healthcare savings, they are quite different. Unlike an FSA, money contributed to an HSA can be invested much like contributions to a 401(k) or an IRA. And unlike an FSA, HSA contributions don’t fall in the category of “use-it-or-lose-it” if not spent in a given plan year. Unused HSA contributions can be carried over from year to year, year after year. That’s right, a plan participant doesn’t need to spend HSA money during any specific timeframe. This makes HSAs excellent vehicles for saving and investing to cover healthcare expenses after retirement – when such expenses are likely to increase. You must have a qualifying high-deductible health plan to enroll in an HSA. Not all employers offer HSAs, but some of those who do make contributions on their employees’ behalf. If your employer does not offer such a plan, HSAs are available with any number of reputable financial institutions.

There is no deductible or out-of-pocket maximum to save in a healthcare FSA. The “use it or lose it” clause is the limiting factor here since most of the money in an FSA has to be used during the same plan year. An FSA participant simply can’t accumulate a large balance in this type of account because of the “use it or lose it” feature. With an HSA, there is no requirement to use the money contributed every year. In fact, the characteristics of an HSA actually encourages the participant to contribute more each year.

The Fine Print...

Problem is, unless folks are enrolled in a health insurance plan with an annual deductible of at least $1,400 for single coverage ($2,800 for a family), they aren’t eligible to contribute to an HSA. However, tons of people meet this standard, but few take advantage of the numerous benefits an HSA offers. Many simply aren’t aware of its several advantageous features: no “use-it or-lose-it” clause to deal with each year; its tax-deductible contributions, which can be invested; and qualified healthcare expenditures you make from this account are tax-free.  In short, an HSA is a tax-advantaged savings and investment account designed to help folks save for their out-of-pocket medical expenses. The central requirement for participation is having a qualifying high-deductible health plan. For 2020, it’s an insurance plan with a deductible of at least $1,400 for single coverage ($2,800 for family coverage). And in 2020, the plan must also conform to an out-of-pocket maximum threshold for an HSA-qualified health plan of not more than $6,900 for self-only coverage or $13,800 for family coverage. An out-of-pocket maximum is a cap, or limit, on the amount of money you have to pay for covered healthcare services in a plan year. If you meet that limit, your health plan will pay 100% of all covered healthcare costs for the rest of the plan year.

Know Your Limits

Contribution limits, which must be made by April 15, are set annually by the IRS. In 2020, they're $3,550 for self-only coverage and $7,100 for a family (HSA participants 55 or older can contribute an additional $1,000 as a catch-up contribution). Be aware (but it’s a good thing) that if your employer makes HSA contributions on your behalf, these are included toward the annual limits.

Invest the Funds!

Contributions made to an HSA don’t have to remain idle – as they would in an FSA. That’s one of the beauties of this type of account. The money can be invested, usually in a selection of options not unlike 401(k) choices. Of course, a participant can leave it in cash or a near-cash equivalent, but why do that? If the money is wisely invested, why not pay certain healthcare costs out-of-pocket and leave your invested dollars intact? If affordable, this practice would allow the participant to use an HSA’s investment feature to build a long-term health savings account… only one of several tax advantages offered by HSAs, some of which aren’t available with other “tax-advantaged” vehicles. Curiously, this investment capability is not widely understood and practiced. Only a small percentage of HSA participants invest their fund accounts – in my mind, the most compelling reason to enroll in an HSA, and let’s discuss why.

HSA Tax Benefits

If you qualify to enroll in an HSA, and then if you invest all of your annual contributions, you’ll be blessed with certain tax advantages that “collectively” aren’t available with other tax-deferred investment vehicles. Consider one of my endless examples using a Bankrate investment calculator: Suppose that at age 25 your qualifying family joins an HSA and contributes the tax-deductible annual maximum of $7,100 (about $592 per month). Suppose further that this money is invested at 7%, compounded annually and grows tax-deferred (just like it would in an IRA, 401(k), or other retirement vehicle) for 25 years. Then suppose, after 25 years, tax-free withdrawals from the HSA (now totaling $469,400) are available to pay for qualified healthcare expenses. What a huge stress-reliever that would be.

Viewed another way, your HSA combines the tax-free withdrawals of a Roth IRA with the tax-deductible contributions of a traditional IRA or 401(k). Or you could simply let it continue to grow another 15 years to provide you with an even larger nest egg ($1,472,000) for healthcare expenses going into retirement at age 65. Even after assuming a 2% annual inflation rate, you would still have spending power equivalent to $667,000 in today’s dollars. And don’t forget the $284,000 of contributions from age 25 to 65 that your family has been able to exclude from income. The only kicker is that the money must be spent on qualified healthcare expenses UNTIL YOU TURN AGE 65!

Qualified Expenses

So what qualifies as tax-free healthcare expenses? Because the IRS provides an exhaustive list in Publication 502, I’ll only mention a few: Prescription medications, nursing services, dental and eyecare, hearing aids, surgical expenses, and yep, long-term care is on the list. By and large, HSA withdrawals must be spent on “qualified” medical expenses as defined by the IRS. However, as subtly mentioned above, once you reach age 65, money can be withdrawn for any reason, but there’s a tax kicker. If not used for qualified medical expenses, withdrawals after age 65 will be treated as taxable income, but no penalty will apply. In short, “over age 65 HSA withdrawals” will be treated the same as withdrawals from a traditional IRA or 401(k), although it's worth mentioning that the penalty-free withdrawal age for most other retirement accounts is 59½ years old. This treatment is another reason why HSAs make good retirement savings vehicles.

But be advised, there is no such thing as a flawless investment account. HSAs, too, suffer the imposition of penalties for “non-qualified withdrawals”. Most prominently, if a participant under age 65 withdraws money to pay for a non-qualifying expense, the result is a stiff 20% early withdrawal penalty – double that of 401(k)s, IRAs, and most other retirement plans. Why? Such non-qualifying expenditures defeat the purpose of HSAs and are discouraged.

Use It

To summarize, the characteristics that make an HSA such a good retirement savings vehicle includes the enhanced family contribution limit of $7,100 ($1,100 greater per annum than for a 2020 IRA); no maximum income threshold as with an IRA; upon retiring, no fretting about Required Minimum Distributions (RMDs) after reaching age 72 as is the case with other tax-deferred retirement accounts; and don’t forget the absence of that onerous  “use it or lose it” provision.

Contributions can be carried over year to year, year after year and can be invested just like IRA and 401(k) contributions. It’s a dollars-and-cents game, folks. Studies show that retired couples should prepare to spend upwards of $300,000 (in today’s dollars) on out-of-pocket healthcare expenses in retirement… all the more reason, if qualified, to consider this tax-deferred investment combined with the ability to take tax-free distributions to cover qualified medical expenses. I’ll close with another boring example: If your tax bracket after retirement is 25% (very possible), without an HSA you would have to withdraw $400,000 from IRA or 401(k) tax-deferred accounts to scrounge up the aforementioned $300,000. With an HSA, you could cover those medical expenses with a $300,000 tax-free withdrawal.

IRS Relaxes Rules on Healthcare Flexible Spending Accounts
May 28, 2020

Last week we discussed a recently revised IRS guidance that allows for mid-year changes to dependent care Flexible Spending Accounts (FSAs). The taxing agency also provided similar relief for the even more popular healthcare FSAs that allow pretax employee contributions to employer-sponsored FSAs to cover unreimbursed medical expenses. Fun Fact: Over 22 million workers participate in healthcare FSAs, four times as many as use dependent care plans.

Healthcare FSA Review

Healthcare Flexible Spending Accounts (FSAs) are popular among workers. However, like dependent care FSAs, they have become potential liabilities for participants who set aside hundreds… even thousands... of dollars to pay for medical care that might no longer be accessible due to the Covid-19 virus.  Healthcare plans allow for $2,750 in pretax contributions to cover out-of-pocket qualified healthcare expenses for the worker, his/her spouse, and dependents. A married worker’s spouse can contribute $2,750 to another healthcare FSA with his or her employer. This represents a significant savings to employees who avoid paying federal income and FICA taxes on the pretax paycheck withdrawals. Employers benefits, too, because they avoid paying the 7.65% employer FICA tax match.

Use It or Lose It

Like the dependent care FSA, the tax-advantaged healthcare version includes an onerous “use it or lose it” feature. Quite simply, if a healthcare FSA participant doesn’t use the money set aside for unreimbursed medical bills within the plan year, the unspent funds are forfeited to the employer. And here’s the Covid-19 rub. Because folks have delayed so many elective surgeries, dental procedures, and other non-emergency medical treatments during the height of the pandemic – and because so many have been reluctant to reschedule such treatments – money set aside in the plan could go unused… and forfeited.

COVID-19 Connection

The new IRS guideline allows – but does not require – employers to amend their plans. The revision allows employees to change their healthcare contributions, including dropping them altogether, going forward. But the employer can choose to amend its FSA, or not. And as to that innocent sounding “going forward” caveat, the employee must spend the money already deducted from his paycheck in the current plan year. Of note, most employers support this change and will likely participate.

The benefit of these rule changes allow the Covid-19 impacted worker to opt out of making contributions during a plan year, an option not previously permitted before, except under restrictive circumstances. At their option, employers may allow either a 75-day grace period after the end of the plan during which any remaining healthcare FSA funds can be spent or grant the ability to roll over up to $550 of unused funds into the next plan year, but not both.

With regard to the money already set aside but yet unused, workers can spend it on certain out-of-pocket medical care to include deductibles and co-payments (but not premiums), dental work, eyeglasses, prescription medications, medical equipment, transportation costs, parking and mileage expenses when making doctor visits, and the like. Also, the IRS healthcare rules had already been tempered a bit by the earlier Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which will allow workers to use “captive” contributions on such expenditures as over-the-counter medicine and feminine hygiene products.

Fair Or Unfair… To Whom?

A worker’s designated annual pretax contribution to a healthcare FSA is “preloaded”… available for use on day one of the plan year. Workers reimburse the employer FSA’s disbursed funds incrementally through paycheck deductions during the plan year. In short, an employee can be reimbursed for a full year’s plan contribution before paying back a penny. And the employer cannot recover unreimbursed funds if the worker is terminated before the balance is repaid. Seems unfair to the employer until we’re reminded that any unused worker contributions at the end of the plan year revert to the employer. Further, if a worker is terminated for whatever reason before all of a given year’s funds are spent, the remaining contributions revert to the employer.

IRS Guidance Summary

Here is the IRS notice in black-and-white:

IRS (2020-95, May 12, 2020) Notice 2020-29

Provides greater flexibility for [workers] by extending claims periods to apply unused amounts remaining in a health FSA for expenses incurred for those same qualified benefits through December 31, 2020; and by expanding the ability of taxpayers to make mid-year elections for health FSAs programs, allowing them to respond to changes in needs as a result of the COVID-19 pandemic.

Notice 2020-33

Responds to Executive Order 13877, which directs the Secretary of the Treasury to "issue guidance to increase the amount of funds that can carry over without penalty at the end of the year for FSA arrangements" from $500, to a maximum of $550, as adjusted annually for inflation.

IRS Relaxes Rules on Dependent Care Flexible Spending Accounts
May 21, 2020
To provide flexibility for employees coping with the fallout from the Covid-19 virus, the IRS has issued new guidelines that allow employers to amend dependent care Flexible Spending Accounts (FSA)s, allowing workers to adjust dependent care plan contributions – including dropping contributions altogether. Click here to watch the video.

FSA Review

Dependent care Flexible Savings Accounts (FSAs) are set up with an individual’s employer who has agreed to participate in such a program. Roughly 85% of employers with 500 or more employees offer them. In those cases, workers authorize their employers to withhold funds from their paychecks each pay period for deposit to an FSA. The worker pays for “qualified” expenses out-of-pocket, and then applies for reimbursement from the account administrator by completing a claim form with receipts or proof of payment attached.

Dependent care FSA funds can only be used for reimbursements that meet the IRS’s definition of an eligible dependent care service. (i.e., care necessary for the participant and/or spouse to earn an income). Qualified expenses include physical care, in-home care, daycare service, summer day camps, before- and after-school care, caregiver transportation, and fees associated with obtaining care. Expenses that do not qualify include overnight camps, housekeeping, music and sports lessons, and education (e.g., kindergarten, summer school, private school tuition, etc.).

The Covid-19 Connection

With millions of people currently out of work, dependent care has become an even more critical issue – perhaps even a looming liability – and a continuing burdensome expense for many American families. Families rely on childcare to facilitate their ability to work. Millions of others are responsible for the care of aging parents or disabled dependents. In short, workers who need care for children under age 13, or an adult incapable of self-care, who lives in their home and who can be legitimately claimed as a dependent on their federal tax form, may qualify for a dependent care FSA. Question is, in today’s Covid-19-plagued environment, how do workers spend FSA funds for dependent care if both their children’s school and/or their after-school facility is closed? The most obvious solution is to request that their employer stop deducting – or adjust – dependent care contributions. The new IRS guidelines make these requests possible… but do not require employer compliance.

In any event, FSAs in 2020 are more flexible for participants whose budgets have been upended by the Covid-19 pandemic. Under these revised (and probably temporary) IRS guidelines, employees can make mid-year changes – adjustments up or down – regarding their contribution amounts. But as before, no carryovers into the next dependent plan year are permitted.

Use It or Lose It

The primary benefit of a dependent care FSA is its tax treatment. All money contributed to the account by a worker is considered pretax, which means employees don’t pay federal, Social Security or Medicare taxes on contributions. (And employers benefit, too. They don’t have to pay Social Security and Medicare taxes on the portion of employee salaries set aside in FSAs.) This effectively reduces the amount of a participant’s income subject to taxation – a significant savings depending upon one’s tax bracket and the amount of the contribution.

However, the IRS does limit the amount of money per annum that a worker can contribute to a dependent care FSA. More specifically, dependent care FSA participants can automatically put away a specified amount of money from their paychecks to spend on child and other qualified dependent care. But there is a catch – a “use it or lose it” feature. Yep, all money in a dependent care FSA must be spent before the plan year ends. Unspent funds are forfeited to the employer. Each worker can contribute up to $2,500 of earned income per plan year to cover qualified dependent care, or $5,000 for workers who are married, filing jointly. If a worker and his/her spouse are divorced, only the parent who has custody of the child(ren) is eligible to use FSA funds for childcare. If a couple is still married, both must work and earn income to qualify for reimbursement (unless one spouse is disabled and unable to work). If not, money contributed to the account will be forfeited to the employer and applicable taxes will become due.

Helpful Adjustments

Before the IRS rule changes, account participants were not permitted to adjust their contributions mid-year except in specific circumstances, including if a school closes, if the employee shifts to working from home, a marriage or divorce, the birth of a child, or some qualifying event that added or subtracted a dependent or spouse. The new IRS guidance allows companies to amend their plans that allow workers to opt into, drop out of, or adjust their contributions mid-year. And to repeat, these new IRS guidelines apply only if the employer chooses to amend its FSA plan (it’s anticipated that most employers will adopt the IRS guidance quickly).

Regarding money already contributed in the plan year, it must still be spent on qualified programs for kids under age 13 and/or for older dependents unable to care for themselves. The agency’s rule changes regarding both dependent care and healthcare FSAs are part of a larger federal government effort to provide affected households “some maneuvering room” under tax rules due to a job loss and/or reduced cash flow. A companion adjustment was that federal filing deadlines and tax payments were also postponed – to July 15. More on the healthcare FSAs in a later blog.

COVID-19 Forces Far-Reaching Financial Lessons
May 14, 2020

A post-Great Recession Federal Reserve study of 5,000 people revealed that 46% percent of Americans admitted to not being able to cover an unexpected expense of $400 without resorting to a credit card loan, a loan from family or friends, or by force-selling a personal asset – perhaps one in a retirement plan. The current COVID-19 upheaval is a harsh reminder to all of us the value of putting money aside for a rainy day or two… or 20. I speak at length about Rainy Day funds in past WynnSights blogs, and in You, Me & the Tree - a nifty lifestyle blog where I make an occasional guest appearance as "Tips From Pops". Check it out!

Rainy Day Realities

Back to reality. Young people tend to avoid budgeting along with forestalling the saving of money for emergencies. Apparently, they don’t want to face the occasional reality of more outflows than inflows – a quandary that necessarily leads to eliminating some desirable luxury or the guilt of not eliminating such a luxury. Just remember, without the guidance of a budget, you are inviting the pain of financial distress without realizing it.

Credit Card Crutches

Without a financial plan (i.e., a personal budget), one clear signal that you’re living on the edge is not being able to pay off credit card balances each month, opting month after month to pay the minimum. Improper use of credit cards is the bane of intelligent financial planning. The possession of too many cards encourages folks to live beyond their means. My personal habit is to use only one credit card. To carry several helps us hide from the reality of how much we’re buying on credit. Putting all of our charges on one card eliminates the excuse of “I had no idea how much I was spending.” And the discipline of paying off that single balance each month helps you avoid the great black hole of credit card debt.

Another clear signal that you’re living on the financial edge is a reluctance to open monthly bills right away. Open them immediately. Do not let them stack up. And pay them as promptly as monthly cash flow allows. The stress associated with that looming stack of unopened bills is unhealthy. Paying them promptly promotes self discipline, a healthy outlook on life, and of course, a healthy credit rating.

Good Financial Habits

The long and short of developing good financial habits stems from having a good financial plan – one carefully followed to avoid the pitfalls of poor decision making. If you work for a company that provides access to 401(k) or 403(b)-type plans, be sure to participate and most certainly take full advantage of any matching offer by your employer (FREE MONEY)… an automatic 100% return on the matched contributions. How many other 100% returns on investment do you enjoy in life? And give serious consideration to opening a ROTH IRA (funded with earned, after-tax dollars) and dare to be average by building your investment portfolio around a low-cost, highly diversified index fund.

Remember, it’s never too late, but early is best!  And aim for 10-15% of your gross pay as a savings objective. Yeah, I know, that’s tough to do… but maybe not as tough as you think. By developing good (or eliminating bad) financial habits and displaying a good work ethic, you are almost guaranteed a financially stress-free life both before and during retirement. Knowing that you are growing a comfortable nest egg no later than in your late 30s and early 40s does two important things: it becomes a tremendous stress reliever, and it provides a sense of satisfaction that your future is more and more financially secure each day.

CARES Act Allows Emergency Withdrawals from Retirement Accounts
May 7, 2020

Provisions of the recent CARES Act – which offers both $1,200 cash payments and bonus unemployment benefits to workers – also makes it easier for retirement plan participants to take early withdrawals and/or loans from those plans for Covid-19-related reasons. To qualify, individuals must fall into one of two main groups: If an individual, spouse or a dependent is diagnosed with Covid-19, or if a person can qualify by having experienced adverse financial consequences (i.e., due to being quarantined, furloughed, laid off,  reduced work hours, etc., related to the coronavirus pandemic).

The legislation temporarily waives the 10% early withdrawal penalty, doubles the amount permitted for a loan from $50,000 to $100,000, doubles the percentage limit from 50% to 100% of the total account balance, and eliminates the federal taxes on such withdrawals if the money is paid back within a prescribed period of time… with strings. The legislation also waives 2020 Required Minimum Distributions from tax-deferred retirement accounts for folks older than 72. See my blog "Did You Know? You Don't Have to Take RMDs in 2020" (4/02/2020) for more details.

Click here to view the Taking Stock video.

Strings Attached?

The CARES Act legislation temporarily waives the 10% early withdrawal penalty for taking early distributions up to $100,000 between January 1 and December 31, 2020, from tax-qualified defined contribution plans (401(k)s, 403(a)s, and 403(b)s, Section 457(b) plans and IRAs). Individuals have up to 3 years to re-contribute withdrawals to a plan. Income taxes will be owed on withdrawn amounts that are not repaid, but individuals are permitted to pay tax on this income over a 3-year period. In addition, COVID-19-related distributions are exempt from the mandatory 20% withholding that normally applies to retirement plan distributions.

Retirement plan loan rules are also modified. The maximum amount is increased for loans made between March 27, 2020 (the CARES Act enactment date) and December 31, 2020. During this period, the maximum loan amount is doubled from $50,000 or 50% of the vested account balance to the lower of $100,000 or 100% of the vested account balance.

Withdrawal or Loan?

The first decision a plan participant faces is whether or not to take advantage of this relief.

It’s a source of money – your money – but do you want to meddle with an important retirement account portfolio? Do you have a choice? If not, comes the second decision. Do you take out a hardship withdrawal or do you loan yourself money? What difference does it make?

At first glance, a withdrawal might appear to be the best course of action. It doesn’t have to be repaid, nor is an automated repayment system instituted. But if an individual can replace the withdrawn funds within three years (on no particular schedule), a tax refund is in order. A loan, however, must be repaid on a predetermined, fixed schedule. So, what’s the concern? History indicates that most folks tend not to pay back withdrawals from retirement accounts but are much more likely to make predetermined loan payments. Human nature, I suppose.

Consider it a Loan

If you absolutely intend to replace whatever amount you take out of a retirement account early, the loan approach might be the  better choice. Why? Primarily because a fixed, repayment schedule makes repayment more probable. To qualify, the loan must be made within 180 days after the March 27 CARES Act enactment date. And the participant won't owe income tax on the amount borrowed from the plan if it's paid back within 5 years. Point is… if you don’t trust yourself to pay back a withdrawal or if your job is in serious jeopardy, go the withdrawal route. Otherwise, consider the loan.

Start with Half

Once you make the loan versus withdrawal decision, you must then decide how much to take out (within the guidelines of the amounts and percentages mentioned earlier). Often, the degree of need for immediate cash is unknown or at best nebulous. A rule of thumb might be to take out less than half of what you “think” you might ultimately require. You can always go back for more once your cash needs gain more clarity. Clear this approach with your employer or plan administrator ahead of time should there possibly be limits on multiple loans. This approach will help you least disrupt your retirement portfolio in case cash requirements prove to be less than initially thought.

Post-Crisis Plan 

Once the crisis passes, individuals should reinstitute their former savings pattern as quickly as possible – and don’t forget that the crisis-related “missed” contributions should be made up. After the first year of re-enrollment begins, an individual can increase the annual savings rate by 2-3%, if affordable, until it reaches the revised 15% cap established by the 2019 SECURE Act. Employers can offer a safe harbor 401(k) plan with an automatic increase (or auto-escalation) feature that raises plan participants' contributions until they amount to 15% of pay (participants can opt out of such increases).

Hopefully, the Covid-19 dilemma will soon be resolved, but it’s especially important that individuals who withdraw or borrow money from retirement plans make wise decisions during the crisis – decisions that don’t create future financial stress, particularly of the sort that will negatively impact your quality of life in retirement.

Save and Invest...Or I'll Wash Your Mouth Out With Soap!
April 30, 2020

Early in this blog’s short life, I made clear that my focus would be on the younger crowd - Millennials and Gen Zers. Mostly because we are often negligent in teaching our youngsters even the basics of personal finance. I consider that a significant oversight… a shortcoming of our education system. And in reviewing my own blogs during the past year, I, too, have been somewhat remiss of the younger folks despite my good intentions. I plan to do better starting today.

Million Years Away

I don’t believe young people are disinterested in saving and investing. I do, however, believe they aren’t terribly interested in investing for retirement, a time in their lives that they view as a “million years” down the road.

“Right now, there are better places to spend money than for retirement,” a young person might argue. “I’ll worry about that later.” A perfectly understandable stance at age 15… or 20… or 30…or 40… well, maybe not 40. But then come comes along a mind-boggling, scary situation like the COVID-19 chaos the world is currently experiencing and it reminds us all - young and old - that saving (period) is key and it's best to start at a young age.

But if nothing else, market corrections and other unanticipated surprises should, at the very least, remind our younger folks of the value of “rainy day” funds – something we should all contribute to before heading down the road to building a retirement portfolio.

Reasons Why...Not

There are major challenges involved in attracting a young person’s attention to the world of saving and investing. Here are some common reasons for NOT dipping a toe in the investment pool:

1. I have a decent job. I still have virtually no money left over to enjoy life, much less save for retirement.

2. I’m just not all that interested in saving money right now.

3. I don’t know the first thing about investing.

4. I don’t have the time to learn how to invest.

5. Investing in the stock market is scary. If I have any surplus cash, I don’t want to lose it gambling on stock.

6. I don’t have enough money to properly diversify my investments.

7. Buy mutual funds… what are those?

8. I’m young - I have plenty of time to plan for my retirement.

9. I have a couple of bad habits that are hard to break. I’ll work on those down the road.

Etcetera, etc., etc.

Worth the Investment

My intent is not to be preachy or critical of other folks’ habits and objectives. My purpose is to convince young people to develop the discipline to save and invest early in life. And to accompany that discipline with the patience and fortitude to avoid joining the ever-present herd of panicky investors. This discipline… this patience… will serve them well throughout life.

And once The Amazing Power of Compounding and an ever-dynamic American stock market begins to reward those ingrained habits, leave that growing retirement fund alone! It’s resilience will be amazing. Yes, there will be setbacks along the way, but that’s why patience is so important. Market corrections like COVID-19 and the Great Recession are part of the deal. Accept that fact and keep on truckin’. Over a lifetime, the trendline will be ever upward. Count on it.

What if I NEED to Sell Investments During Coronavirus Crisis?
April 23, 2020

What to do? What to do? I’ve been asked by numerous subscribers whether or not they should sell into this COVID-19 market chaos – a question complicated by the fact that each individual has his or her own unique financial circumstances. Watch the video below here.

Buy, Sell or Hold?

I’m one of those buy and hold chaps despite the fact that these big “corrections” can be very unsettling. Still, there’s one thing that never made much sense to me… following the herd. When investors panic and sell after a market suffers a big drop they either lock in a loss, or if they still enjoy a gain in what they sell, they create a taxable event. Later, after the market recovers (and it always does, although the timing is variable), those who did sell are never sure when to buy back in, often missing 40-50% of the recovery… assuming they regain the courage to buy back in.

This is Normal  

I’ve experienced several of these major corrections – the 1990s, the early 2000s, and the 2008-09 Great Recession – and each time, I continued to BUY (on a dollar-cost average basis) both during the down- and upside of the  cycle. Each time… so far… it has proven to be a beneficial strategy. Because this correction has already taken a sizable chunk out of the market, I suggest that it might not make much sense to sell. I also suspect that the volatility out there is not yet over, but who can be certain about that. Unfortunately, some folks don’t have the option to NOT sell, in which case they do what they have to do. I’m merely suggesting that if you do have the option NOT to sell, then consider staying put. Be ever mindful of the fact that declines become recoveries. It requires patience and fortitude, but this, too, shall pass.

Can't Touch This

As in most major corrections, many folks (including retirees) lose some portion of their livelihood, if only temporarily. Nevertheless, they have compelling reasons to make up the lost income. This is a time when care should be taken about how to compensate for that loss – about what to sell and what to retain. Keep in mind that quality stocks and stock mutual funds have usually recovered very strongly after a big correction – and often that rebound occurs before a full economic recovery. I suppose it’s because, based on history, folks anticipate recoveries before they happen; thus, they happen. In any event, if possible, preserve those assets with the greatest appreciation potential. Many folks who follow my approach of investing choose to automatically reinvest stock or stock fund dividends and capital gains during the good times… and during the bad (see dollar-cost averaging above) if possible. When they can’t, they should try to keep those sources of income – the stocks and/or stock funds – by diverting the dividends and capital gains from automatic reinvestments to replacements for lost income. That way assets are retained to participate in a future market recovery. To repeat a newly coined COVID-19 era phrase: Your portfolio is like your face: Don’t touch it!

Think Counterintuitive 

If you must sell assets, first review bond funds you might own, or if you own individual bonds, consider selling those closest to maturity. As to stocks, isolate those for sale that have weathered the storm best. It might seem counterintuitive, but stocks that depreciated the least on the downside may offer the least potential during a market recovery. Conversely, those assets suffering the most might have the greatest upside potential, making them more worthy candidates to hold. And if possible, avoid selling everything at once. Consider raising just enough money to cover the next month’s expenses. Dollar-cost averaging often works to your advantage whether buying or selling.

Never Too Late

Unfortunately, there’s no magic formula for surviving a big market correction. Oftentimes, doing nothing makes the most sense, but it’s a path many investors are simply unable to follow. They must raise cash to fill the gaps of lost income now. And it often makes sense to consider selling assets with the least future appreciation potential (i.e., bonds or other fixed income assets), including those assets that suffered the least on the downside, but which are likely to appreciate the least on the upside. To beat a dead horse, a good financial plan… starting with a “rainy day” fund… is the best antidote to navigating a major correction. For some, perhaps it’s a bit too late to eliminate the pain of this one, but it’s never too late to prepare for the next one. And it will come.

Beware! The Inflation Monster Can Wreak Havoc on your Retirement
April 16, 2020

I have mentioned this avaricious old dude in passing, but it is now time to write a blog focused on the devastating impact Izzy the Inflation Monster can have on the long-term health of your retirement portfolio. First, we’ll draw a picture of how a particular rate of inflation can affect your future retirement purchasing power versus how much the same dollars would buy you today. The average inflation rate hops around like a floppy-eared jackrabbit over time, but since the early 1900s America’s inflation has averaged about 3% per annum (In the 1970-1979, it averaged over 7% – during the period 2010-2018, about 1.80%). Two percent or even 3% doesn’t sound like much, but over the long haul, it can gobble up meaningful chunks of your purchasing power in retirement. Watch the video here.

Will You be a Millionaire?

In our example, we will assume that beginning at age 22, a wise young investor, hoping to save $1 million before retirement, opens a Roth IRA, uses a Bankrate Investment calculator to determine the amount of monthly savings ($367) needed to reach that goal, routinely invests the $367 in a Total Stock Market Index Fund yielding 6% over time, compounded quarterly, and retires at age 67. Without considering Izzy the Inflation Monster’s impact, after 45 years, the plan produces the desired $1 million. Wow! One million bucks! Is the investor sitting pretty for the next 10-30 year of life in retirement, or what? Maybe, maybe not.

Inflation's Impact

Let’s give the investor credit for the patience and fortitude required to enter the retirement years with $1 million. That’s a lot of scratch. However, using the same data, but allowing for an inflation rate of 3%, let’s determine what the purchasing power of today’s dollars (the $1 million) will actually buy in 45 years. How about $265,000? WHAAAT! That’s right. Izzy is voracious. At a more manageable inflation rate of 2%, the purchasing power would equate to $411,000. Now you know why I call Izzy an Inflation Monster. That old boy will take $1 million and gnaw off huge chunks in terms of purchasing power over time.

What To Do?

To get a better feel (hypothetically) for how to end up with $1 million of purchasing power in 45 years, let us do some reverse engineering. In a 3% inflation environment, you would need to invest $1,385 per month (instead of $367 per month) for 45 years at 6%, compounded quarterly to realized $1 million of actual purchasing power in 2064. In short, you would need to accumulate about $3.78 million over the 45 years to purchase what $1 million would buy you today.

When Bread Cost 28 Cents

Conducting this exercise can be pretty darn discouraging to a potential saver/investor. But remember this. Generally speaking, inflation causes almost everything to adjust upward in price. I say generally speaking because some products actually improve in quality and go down in price (i.e., flat-screen television sets). As the cost of living increases, salaries and other sources of income tend to adjust upward.

Let’s go back 45 years and review a few income and cost numbers. In 1973, the average retail price of gas was $.39, equivalent to $2.31 in 2019; a loaf of bread cost $.28; a gallon of milk, $.53; a car, $3,500; a house, $47,000, and average income hovered around $9,600. Generally speaking, $300 in 1973 would equate to $1,773 today (the annual inflation rate over the period since 1973 approached 3.94%).

My point is simply this. When setting retirement goals (in dollars), DO NOT forget to consider the potential impact of Izzy the Inflation Monster on those goals.

Arm Yourself

So, how does an investor protect against the ravages of inflation? You’ve probably already guessed what my primary tool would be – diversification. And the easiest way to accomplish that is by building your portfolio around our old friend, an index fund. Tie yourself to the broad market, which (so far) has grown in value over time… a broad-based, built-in inflation adjuster. Other income streams that provide inflation protection include rental property (if you include inflation-adjusted rent provisions in the contact); and Treasury Inflation-Protected Securities (TIPs); or perhaps those Target-Date funds of funds. And consider delaying those annually inflation-adjusted Social Security checks as best you can. The greater Social Security is a percentage of your total income, the greater your protection against inflation. And keep the rate of inflation in mind once you begin taking withdrawals – traditionally 4% per annum from your collective nest egg.

Fixed First

When taking withdrawals from your retirement portfolio, try to preserve those income sources that are blessed with inflation adjusters by drawing down fixed income puddles first. As an example, pull from no- or low-interest-bearing cash reserves first, but be sure to maintain a comfortable “rainy-day fund”. As needed, supplement your cash reserves with maturing bonds. And replace maturing bonds, when possible, with the sale of “surplus” equities in those years when your equities achieve above-average returns.

It is a juggling act but do your best to keep the correct proportion of fixed income to equities – a necessary activity if you hope to outwit and outlast old Izzy. And speaking of social security, which generally adjusts for inflation in most years, let us address an age-old question. Is your Social Security benefit an asset or a bond…or neither? We’ll discuss that in my next blog.

COVID-19: Don't Wait til It's Too Late

Many investors will wait until the pandemic is contained. Many will wait until a vaccine is discovered and distributed. Many will wait until the country goes back to work, reviving our massive economic engine – which will not happen overnight. Waiting…waiting…waiting. Lots and lots of waiting. And just when will you know for certain that these things have happened… will it be before or after the news breaks? Perhaps it is wiser to dollar-cost average your way through these various elements of recovery. In short, be there before the news breaks that these events have happened. If you are not there before the news breaks, odds are, you will miss a sizable portion of the recovery associated with each.

COVID-19 Teeter-Totter: Balancing Our Nation's Health and Wealth
April 9, 2020

Please indulge me, but today’s blog borders on being a rant…in response to a question posed to me by several inquiring minds and my webmaster: Do you believe the $2 trillion government stimulus bill is enough to avoid a possible recession in the near term?


Let me first mention the obvious. Our country has a huge and growing liquidity problem – business and personal – forced upon us by government. This necessary legislative action immediately created a burdensome nationwide cash crunch due to loss of income whether salary-related or bottom line induced. Question is, will this so-called stimulus bill, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) avoid a near term recession?

Recession… or Depression?

No, in my opinion. I fear that a near term recession is already upon us.

You don’t shut down 60-70% of a national economy for weeks and months without inflicting damage. The more pertinent question should be, will the CARES Act help us avert a deep, more lasting depression? In that regard, I’m more optimistic…  that the Act might at least stabilize the economy, if not immediately bring it back to health.

What I personally most crave, however, is a “flicker of light and hope” at the end of my tunnel to strengthen this optimism… as I think most Americans do. Our leaders have some difficult decisions to make – tough, gut-wrenching decisions – balancing the current need to “shelter in place” (to flatten the inflection curve) against the necessity for our country to “get back to work”. The CARES Act in all its trillions of dollars of glory has the potential to financially bridge the gap from one task to the other. But it’s a tottering bridge with many, yet ill-defined underpinnings. No question, the CARES Act lends a vital element of financial aid to many important aspects of our economy, and we can only hope that it’s enough. Still, America’s amazing and successful history didn’t just happen by writing checks. In all of our country’s previous and defining challenges, it required – and received – timely leadership; leadership that successfully rallied the support of a questioning but resilient citizenry… an industrious citizenry always eager to go back to work.

Inspiring Confidence

I personally am encouraged by our President’s wise delegation and proper distribution of the Coronavirus War’s daily operational authority to Vice President Pence and the Whitehouse Task Force’s highly competent scientific and administrative experts. I’m heartened by his unending and deserved praise of state governors and local leaders. I’m encouraged by his heartfelt recognition of thousands of that brave frontline force of doctors, nurses, medical staff, emergency personnel, factory workers, supermarket clerks, and other essential private sector employees who daily risk contagion to keep us healthy and well fed (and supplied with toilet paper). I am encouraged by his relentless support of the nation’s confidence in itself – a confidence so necessary if we are to emerge from this medical catastrophe to the worker-bee society we’ve always been.

Growing Our Government

There are always reasons to criticize a sausage-making legislative action as massive as CARES, larded with unneeded doses of what many consider wasteful spending on matters unrelated to the coronavirus – a quarter of a trillion dollars of payments to Americans whether or not they are affected by the virus. Is it really that difficult to determine who is not affected by this scourge?

And how about the unemployment insurance premium beyond 100% of wages lost. Do we really need additional incentives in this country for people not to return to work? Mark my word, the $600 weekly bonus on top of normal unemployment insurance will slow our economic recovery. The federal government is giving millions of people a raise merely for losing their jobs. In short, when businesses finally start to reopen, they will be competing with Uncle Sam for employees… because those unemployed bonus recipients will be earning more by remaining idle. Why rush back to work? And why do we reward…without oversight and with no strings attached… certain federal, state and local government agencies who’ve long been known for mismanaging their budgets? And how about that oft-mentioned $25 million Performing Arts stage to nowhere – the Kennedy Center “virus relief”?  Some say the biggest recipient of CARES largess, over $600 billion, is government. The list of goodies are too many to cite, but they collectively act as a major expansion of the welfare state. As usual, the swamp writes off Washington transgressions as “Oh, well, it’s just Congress being Congress." Ah, politics. Sometimes I truly wonder if we are “the best of the worst."

Filling Needs

I’m hopeful that the $2 trillion CARES Act will be adequate enough to avoid a deep depression, but the ride is going to be bumpy, indeed. What I’m really hoping is that our President and his team will continue to exercise the kind of leadership they have demonstrated in recent weeks sufficient to avoid a more serious economic setback than the aforementioned recession. The key will be, despite its wasteful propensities, this bridge of financial assistance so necessary to getting our people back to work by providing needed funds for medical supplies to hospitals, ventilators for patients, personal protection equipment for doctors and their staffs, liquidity for businesses whose revenue streams have been disrupted or eliminated by The Great Lockdown, the Treasury’s nearly half-trillion dollar Exchange Stabilization Fund to backstop the Federal Reserve’s support to credit markets and individual companies (capital used to leverage trillions of dollars in loans to larger companies (loans, not grants), and $400+ billions in loans to small businesses with fewer than 500 employees (portions of these loans devoted to payrolls would be forgiven if the workers aren’t laid off).

No Panacea

If you’ve managed to stay awake while reading through that last paragraph, you will quickly understand that the CARES Act is no panacea for a swift and clean recovery. Much damage has already been done by this nasty virus. Layoffs will likely continue, and weaker businesses will continue to declare bankruptcy. We can only hope that, given the time this bill provides, our President, his team, and the states’ governors will provide the leadership necessary to pivot to an effective “back to work strategy” that will lead us to a full recovery. And if they provide that inspirational leadership – and hope – to all of us, with our help, we will be successful.

Unwinding the Damage  

And finally, let’s hope that after this horrific coronavirus moment passes, those in charge will at least try to distinguish between the temporary and permanent expansions of government codified in the CARES Act. The virus will have done enough damage to our country. We shouldn’t let it be the reason for a $600 billion permanent government power grab.

Did You Know? You Don't Have to Take RMDs in 2020
April 2, 2020

Among the important provisions of the Coronavirus-related CARES Act are waivers for 2020 Required Minimum Distributions (RMDs). Retirees with withdrawals due in 2020 from their 401(k), 403(b) or an IRA all qualify (as do their beneficiaries). And, yes, the waiver includes those who turned 70½ in 2019 and had to take their first RMD by April 1, 2020. Watch the video here.

Why is this Helpful?

Why is this waiver helpful?

Most 2020 RMDs are based on retirement account values at year-end 2019. At that point in time, the Dow Jones Industrial Average (DOW) stood at 28,538, near its historical high. I know, I know. It hard to remember that high considering our new reality. Today’s DOW opened at 20,820… over 7,700 points below the 2019 close. Without this timely waiver, in all likelihood, retirees would have to sell a greater percentage of their 401(k), 403(b) or IRA balance to meet the 2020 RMD threshold. The result would be the payment of taxes based on year-end 2019 values  that have since significantly declined. With this waiver, Congress gave retirees more time to – hopefully – recover a portion or all of those losses. That, of course, may or may not happen, but hope springs eternal.

Any Downside?

Is there a downside to the waiver? Not really. Accepting the waiver is a choice, not a requirement. RMDs are the minimum amount retirees must take out in a given year. And, of course, they can always take out more than was initially required if need be. In fact, many retirees do just that. Fact is, the RMD suspension puts retirees in total control during the 2020 waiver period. They can withdraw some or none depending on their specific needs.

Unfortunately, about 80% of IRA owners will not benefit from this waiver. These retirees depend heavily on RMDs for annual retirement income. They will withdraw the required amount… and more…  regardless (source: the U. S. Treasury). For the other 20%, it raises the question of whether or not to withdraw even if they don’t have a current need for the money. Why pay tax on withdrawals in 2020 if the income is not needed to make ends meet? There are other considerations, so read on.

Other Considerations

It never hurts to carefully review ones 2020 tax situation before deciding yea or nay. For whatever reason, you may find yourself in a lower tax bracket situation, offering the opportunity to take advantage of lower tax rates versus later years of “anticipated” higher tax rates.  

Another thing to consider, because market values are now lower, 2020 might be a good time for a Roth IRA conversion. With the federal government taking on multi-trillion dollars of debt to battle the virus, it’s likely that both market values and tax rates are going to increase in the future.

Why A Roth Now?

RMDs cannot be converted to Roth IRAs (remember, you took a tax deduction when you contributed to that traditional IRA and by requiring RMDs if how Uncle Sam finally gets his cut). But under the waiver, there are no RMDs (in 2020). So, you can withdraw funds from the traditional IRA at the currently reduced value, pay the resultant lower amount of tax and then deposit those funds into a Roth IRA. Yes, I know, you pay taxes on the conversion (just like you would have on non-waived RMDs), but your RMD could not have been converted to a Roth. And even though you paid the tax on non-waived RMDs, you lost out on the conversion benefit. Now, during this 2020 RMD waiver period, you can get more for the taxes paid simply by being able to convert the withdrawn funds to a Roth IRA. In short, RMDs due for 2020 are waived, but you can take them if needed or simply to take advantage of the aforementioned tax planning opportunities.

Fair “Conversion” Warning!

I’m not a financial adviser, nor am I a professional tax adviser, but this seems to be an excellent opportunity to consider a Roth conversion. If you happen to be in that 20% category that doesn’t need the money, consult the experts and take a hard look at the conversion. But remember, once you convert to a Roth, it cannot be undone. The conversion is permanent, and the tax must be paid. The key factor in making a conversion decision is your own prediction of tax rates. If you expect your future tax rate in retirement to be the same or higher, a conversion should be to your advantage.

Roth v. Traditional IRA

While we’re on the subject, let me remind you of potential other benefits. Obviously, the amount converted to a Roth removes those dollars from your Traditional IRA, which decreases future amounts of taxable RMDs. And lowering your future taxable income might also lower the taxable percentage of your Social Security benefits as well as the amount taken out of your Social Security check for Medicare purposes. By the way, those Roth funds will also pass tax-free to your beneficiaries. And by converting to Roth funds when the market value is 20-30% (or more) lower means that any future rebound will accumulate tax-free; whereas, had you not converted, rebound gains in your traditional IRA will eventually be taxed at personal rates.

Coronavirus Crisis: Should I Buy or Sell My Investments, or Neither?
March 26, 2020

When the stock market suffers a “crash” of significant proportions, the most common question asked by those with a position in the market is: Do I buy, sell or do nothing?

I happen to be a chap who tends to do nothing…well, not nothing. Those who follow this blog are aware that I favor mutual funds, particularly index funds. And as a general rule, all earnings from these funds – dividends, bond interest and capital gains – are automatically reinvested. In the three major market corrections I have experienced (and several minor ones), I haven’t veered from this practice. In a manner of speaking, I dollar-cost average as rule of thumb. Watch the video below at https://youtu.be/OA8rFxUj7pU

COVID-19: This Too, Shall Pass

Without question, the Coronavirus pandemic has caused a medical crisis of immense proportions, and in its wake, is creating an extremely chaotic stock and bond market upheaval. But from a historical perspective, there is little reason to panic. The economic impact of these dreadful events do dissipate over time¹. And such short-term market conditions do create opportunities for savvy investors. I’m not suggesting that folks ignore short-term consequences, but neither should they abandon their PDQ Principles of investing going forward.

Dollar-Cost Averaging…Up Or Down

Everyone has his or her own personal circumstance when it comes to deciding what to do in the event of a major correction. Some folks simply must sell into a downturn because of extenuating circumstances, in which case, it is what it is. If you happen to be an individual not in that situation, my experience has been to stay put. However, if your question is should I sell or should I buy (ignoring the stay-put scenario), then I would suggest in either case to do it gradually as opposed to going all in. In short, if you decide to sell to avoid major damage, do so on a measured basis as opposed to selling all at once. Conversely, if the market seems to be offering you some amazing opportunities, buy, but again do so in a measured way.

Doing Nothing

Major corrections tend to surprise us even when alarming trend lines are stirring our suspicions. For this reason, we tend to want to join the herd in reaction to these suspicions. By selling into a dip, one of two things is likely to happen. You’ll lock in losses, perhaps unnecessarily, or you’ll lock in gains, creating a taxable event, again perhaps unnecessarily. And then, after a bottom is found, when do you get back in…if ever. It’s not unusual for people to miss 20… 30… 40% of a recovery before they convince themselves that the market has rediscovered its footing.

That Buffett Fellow Again

When we experience one of these gut-wrenching market declines, I’m reminded of what Warren Buffett, the Omaha sage, wrote in his 2016 annual letter to Berkshire Hathaway stockholders. Mr. Buffett is an astute investor who views bear markets as opportunities… the louder the growl, the bigger the opportunity. He penned the following in 2016:

“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.” Mr. Buffett, a modern-day (but more philanthropic) Scrooge McDuck, has been swimming in a pool of  $130 billion, waiting for such an instance. But he’s a patient man, and I suspect he’s dragging out those washtubs as we speak… at the same time fostering great sympathy for the tragic medical impact the coronavirus is having on so many families."

Bear Market Plus

All other things being equal, bear markets are real world opportunities… regardless of the causative factors… that many folks too frequently turn into financial negatives. What’s the old saying, “Be patient, this, too, shall pass.” And based on past experience, it often passes rather quickly. Do the commonsense things that matter. Make high-quality, low-cost, well-diversified investments and exercise the necessary patience to let them work for you over the long term. You may not be able to employ Mr. Buffett’s washtub approach but practicing those PDQ Principles might enable you to dig out a tablespoon or two… perhaps even a teaspoon might work for us lesser mortals.


¹Fourteen S&P 500 bear markets (losses of greater than 20%) have ravaged investors since 1929. The shortest, a 20% bear market, occurred in late 1990, lasting less than three months. The deepest, an 86% doozy, roamed from September 1929 till June 1932. The longest, a 60% growler, lasted from March 1937 to April 1942. On average, these dozen or so bear markets declined an average of 39% and lasted 19 months.
Target-Date Funds: Simple, Diverse and Great for the Autopilot Investor
March 19, 2020

If not by now, you will soon be fully aware of my devotion to the simplicity of index fund investment portfolios. Many of my examples focus on the “early-in-life” saving for retirement by investing in a single index fund to achieve a modicum of financial comfort thirty… 40… 50 years hence. But, of course, there are more ways than one to skin a cat, while maintaining an allegiance to those PDQ Principles I mention so frequently. Let’s consider another increasingly popular approach.

Target-Date Funds

Target-date funds (TDFs) are offered to investors that seek to grow assets over a specified period of time, usually for retirement. Often named for the year in which an individual plans to retire, the fund’s asset allocation becomes a function of the time available to meet the investment objective.

The notion behind TGFs is something that, not surprisingly, has a great deal of appeal to me – their simplicity and diversity. Generally speaking, most of us accept the idea that stocks are riskier than bonds; that as we grow older, it makes sense to reduce market risk by holding more bonds in our investment portfolio than stock; and that rebalancing a portfolio to properly weight the stock/bond ratio makes sense along the way. Therein lies the appeal of TGFs. By design they radically adjust to a less risky (more conservative) investment mix as the so-called “target date” of an investor’s retirement looms.

This simplicity makes TDFs increasingly popular vehicles for 401(k) plans – and attractive to investors prone to putting their investing activities on autopilot. Particularly when the fund’s portfolio is allocated to various index funds.  Take the case of a young man hoping to retire in 2065. He would likely choose a more aggressive target-date 2065 fund. An older individual nearing retirement (say in 2025) might choose a more conservative target-date 2025 fund. My fund company of choice, Vanguard, offers a comprehensive series of target-date funds¹, using several index funds as underlying securities for the investment. Let’s compare a couple of their funds to illustrate those target-date characteristics:

Vanguard Target Retirement 2065 Fund (VLXVX)

The Vanguard Target Retirement 2065 Fund (formed 7/12/2017) has a low-cost annual operating expense ratio of 0.15%. The Fund’s portfolio percentage allocation as of January 31, 2020, stood at 54.2% of assets invested in VG: Total Stock Market Index Fund, 35.6%  in VG: Total International Stock Index Fund, 7.1% in VG: Total Bond Market II Index Fun, and 3.1% in VG: Total International Bond Index Fund. In short, a more aggressive 90% in equities and a conservative 10% in bonds and cash equivalents because of its long-term horizon.

Vanguard Target Retirement 2025 Fund (VTTVX)

The Vanguard Target Retirement 2025 Fund (10/27/2003) has a low expense ratio of 0.13%. The fund’s portfolio percentage allocation as of January 31, 2019, stood at 36.2% invested in VG: Total Stock Market Index Fund, 23.5% in VG: Total International Stock Index Fund, 28.4% in  VG: Total Bond Market II Index Fund, and 11.9% in VG: Total International Bond Index Fund. This is a less volatile, shorter-term mixture of 60% in equities and a more conservative 40% in bonds and cash equivalents.

Beyond the target date¹ – for folks already in retirement – the Vanguard Target Retirement Income Fund (VTINX) gravitates to an even more conservative, less volatile asset allocation (roughly 18% in domestic equities, 12% in international equities, 37% in domestic bonds, 16% in international bonds, and approximately 17% in short-term TIPS (Treasury Inflation Protected Securities). Its annual expense ratio is a very low .12%. Although I used Vanguard funds in my hypothetical example, a wide variety of marketplace target-date options await the investor – funds with various asset allocation strategies to fit differing risk and management preferences.

Nothing Is Foolproof

The Great Recession of 2008-09 reminded many investors that even for folks close to retirement, TDF’s have their own shortcomings. With all of the talk of their conservative mix of highly diversified investments as retirement nears, they still hold a certain percentage of investments in stock, and they do take a one-size-fits-all approach to investing. In short, the funds simply can’t consider each individual investor’s unique portfolio needs. And the automatic approach to investing strategy simply ignores changing market conditions. Therefore, it’s important that investors consider the caveats of  their risk profile when considering TDFs, including the cost and performance of a particular company’s TDF portfolio. It’s always essential to compare fees, and it goes without saying that any conscientious investor should continue to pay attention to changing market conditions. No approach to investing should relieve us of that duty.

For inexperienced investors dealing with an array of confusing choices offered by their employer’s 401(k) program, TDFs can be a relatively low risk starting point in the saving and investment cycle. But there are no panaceas out there. As conditions change in one’s financial life, the types of investment suitable to those changed circumstances might also change.

Coronavirus: Lessons Learned?

According to Morningstar Direct, in 2008, target-date fund portfolios for folks planning to retire in 2010 took a nose-dive of 36% from the market’s October 9, 2007 peak, on average, during the Great Recession (the broad index fell 55% during that crisis). Compared to the current coronavirus scare, from the February 20, 2020 market high through last Thursday, TDF portfolios of folks who planned to retire in 2020 dropped by about 13%, on average. During the Great Recession, the 36% loss by near-retirees in TDFs represented more than two-thirds of the 53% decline suffered by those planning to retire in 30 years. By comparison, losses by today’s investors close to retirement represent about half of the 24% market decline.

Hopefully, lessons were learned from the bitter Great Recession experience. We’ll soon find out.  


¹Vanguard Target Retirement Funds offer a diversified portfolio within a single fund that adjusts its underlying asset mix over time. The funds provide broad diversification while incrementally decreasing exposure to stocks and increasing exposure to bonds as each fund’s target retirement date approaches. The funds continue to adjust for approximately seven years after that date until their allocations match that of the Target Retirement Income Fund (Source: Vanguard).
Watch Those Pennies. The Dollars Will Take Care of Themselves.
March 12, 2020

I practice this philosophy every day… obsessively, according to my Gen-X daughters. It’s the underpinnings of everything I have to say about saving and investing. Face it, if you don’t save, you have nothing to invest – unless you’re a debt-leveraging dude. And a critical ingredient of saving is watching those pennies…every single one. Recently, while wandering around Lowe’s tool department, I spotted a penny on the floor. Out of sheer habit, I bent over, picked it up, and stuck it in my pocket. Was it worth the effort? No, but the ingrained habit of watching those pennies is what’s important. (Watch the video below.)

A Penny's Worth

Watching your pennies is a very important factor in making quality investment decisions. In fact, it is crucial to optimizing return on investment. Focus for a moment on the simple act of deciding which of three investments to make. Mutual fund companies charge an “annual operating expense ratio” for managing money in their funds (there are no free lunches, but Vanguard’s John Bogle certainly made the Wazoo crowd more honest than it was prior to the mid-1970s).

Let’s assume that you’re investigating a possible $10,000 investment in three funds of relatively equal quality: 1) a Total Stock Market Index fund that charges an expense ratio of 0.04%; 2) a fund that charges 0.25%; and 3) a third that charges 0.90%.

How does your final choice impact the value of your retirement portfolio 40 years hence, given a theoretical market yield of 7% on each, compounded annually? Per the results in the table, with the first fund, you accumulate approximately $147,400 of value, in the second case $135,500, and in the third case $104,300.

True Cost of Tiny Fees  

The significant variable in our example is the annual operating expense ratio. In short, a fraction of a single percent (i.e., the .86% difference in Case One and Case Three) could ultimately reduce the value of your retirement portfolio by  as much as $43,000 after 40 years on a relatively small initial investment of $10,000. SO, WATCH THOSE PENNIES! Make this mistake enough times while waltzing toward retirement and dog food might be in your future. (By the way, the $43,000 difference is comprised of $14,200 in additional fees and $28,800 in opportunity cost associated with paying those additional fees.) That’s the money the late John Bogle spoke of when he said, “You get what you don’t pay for.”

It's All Hypothetical

The scenario I paint above is, of course, hypothetical. Future investment rates of return aren’t predictable with any certainty. Investments that yield higher rates are generally subject to higher risk and volatility. Rates of return vary widely over time, especially for long-term investments, including the potential loss of principal. However, paying a higher annual operating expense has little to do with market risk and more to do with watching your pennies. And if you don’t avoid those tiny fee differentials (i.e., watch those pennies), the down-the-road impact on your lifestyle in retirement can be significant.

A Note: The Coronavirus On Steroids

With dizzying speed, the Coronavirus has moved the market index from its recent all-time high to bear market territory in just 19 sessions! Amazing. In previous downturns, it has taken the index, on average, 136 trading days to enter bear market status from its most recent high (Source: Dow Jones Market Data). The combination of this new virus and the ridiculous Saudi/Russian kerfuffle regarding crude oil production has been particularly unsettling to investors.

This, too, shall pass, folks. Just keep the faith.

The Skinny on Non-Retirement Household Savings Accounts
March 5, 2020

During this endless political season – I’m fine with about six months of campaigning instead of two years – there have been some behind-the-scenes mutterings about how to address America’s extremely low non-retirement household savings. A solution to this dilemma, partial or otherwise, might help stem the ballooning dependence of many of our citizens on so-called government entitlements. Could such a solution be accomplished through the tax code without feathering the nest of those big birds in the upper branches of our national tree? Perhaps. In addition to encouraging non-retirement household savings, such a program might also address the income disparity between those upper branch big birds and the many smaller birds in the middle and lower branches.

Rainy Days, Indeed

According to a 2018 Federal Reserve study, the average American family has less than $11,000 in non-retirement household savings… few readily available financial resources to deal with an emergency. Why? Do they lack the ability... the motivation... the whatever… to create a “rainy day” fund? Yeah, I know, I blogged about rainy day funds back in July 2019, so let’s not cover old ground. But I would like to discuss one idea that is making the rounds among Trump economic advisers should his administration serve a second term.

What’s The Plan?

Who might be the target of these non-retirement household savings accounts? Perhaps those American families who occupy the lower- and middle-income branches earning as much as $200,000 a year. How’s that for attempting to reduce the usual clamor of “tax cuts for the millionayes and billionayes”? So, how is this proposition different from existing retirement plans, you ask? It has some similarities and some distinct differences. The non-retirement household savings account would allow eligible families to sock away up to $10,000 per year pre-tax in a savings fund. A popular suggestion is that the money be invested in low-cost stock index funds, which would minimize risk through diversification. Sound familiar? These features would expand ownership of stock to all participants, allowing millions more folks to share in future stock market gains. These features would not only help reduce the wealth inequality between the big and small birds, they would also enable many more of the smaller birds to enjoy The Amazing Power of Compounding.

What's The Difference?

This non-retirement household savings account would, of course, be voluntary in nature and employers would be encouraged to match employee contributions. After an accumulation period of five years, funds in the plan could be used for virtually any purpose: to supplement income in the event of job loss; for all emergencies; to buy or improve homes; to start a new business; to send kids to college and/or to private or tech schools; and yes, even for retirement. In short, this type of plan is not meant to be restrictive of use; rather, it’s purpose is to encourage non-retirement household savings.

“Too Familiar” Tax Feature

There would be one very familiar feature. It’s well-known that Uncle Grabby (IRS) gets grumpy when he loses revenue. As with distributions from pre-tax contribution retirement accounts, Grabby would recapture tax revenue delayed by contributions to these household funds when the money is finally withdrawn and spent. In short, and as usual, Grabby would get his pound of flesh by taxing those pre-tax contributions – and the dividends and capital gains they earn – when the money is finally withdrawn. But withdrawal is not a requirement.

In Summary

These tax-affected non-retirement household savings could well be a major step toward replacing the entitlement culture with incentives to save for broad-based wealth creation – I call ‘em fat and sassy, tax-advantaged rainy day funds. And they would certainly be better than another proposition being circulated by certain “Deep State” forces – a plan to eliminate the existing pre-tax contributions to retirement plans and go “all in” on Roth-type plans. In short, under this troubling proposition, all monies contributed to retirement plans would be after-tax dollars. No pre-tax dollars allowed. I’m a firm believer in Roth plans, but it’s sure nice to have the choice of paying taxes now or paying them later.

A Virus Note

Since 1994, 10 major health issues – Zika, SARS, avian flu, etc. – have significantly impacted global markets. In eight of those cases, stocks climbed more than 10% after 12 months once investors properly evaluated the threat. Since 1946, there have been 26 market corrections of at least 13%. On average, it has taken about four months to recover to pre-correction levels¹. Panic if you must, but patience might serve you best. Just remember, big market declines are unsettling. Usually they’re linked to some totally unexpected global event – a time, perhaps, to re-assess your “true” risk tolerance. If you’re very uncomfortable with today’s events, you might want to consider a different asset allocation once the market recovers…and it will. We just don’t know when.

¹Source: Adena Friedman, President and CEO of Nasdaq, Inc.
Winning Your Own Lottery
February 27, 2020

How often do you play the lottery? It’s not uncommon for routine lotto participants to spend $1,000 or so per year chasing this “get-rich-quick” gambit. Buy a ticket and win $100, a $1000, perhaps $1,000,000+ against overwhelming odds. Recall the incredible $1.537 billion drawing won by a single South Carolinian. The odds of winning that prize exceeded 1:302,000,000, roughly the same odds as one citizen in the United States (population 333,000,000+) being selected in a drawing to win the big prize. It happened, but it wasn’t you… or me… or all the other 333,000,000+ Americans. Watch the video below.

Improve Your Odds

How about reducing your odds from 1:302,000,000+ to a more believable 1:1 depending on how patient you are over the next 45 years? Here’s the deal. For those of you in the early stages of a career (say 22 years of age), instead of buying $100/month of lottery tickets, contribute an initial $3,000 (the initial minimum contribution in after-tax dollars) to a Roth IRA and deposit the $100/month (again, after-tax dollars) of “lottery savings” into the Roth for 45 years. Invest every penny of it in Vanguard’s Total Stock Market Index Fund, Admiral shares, compounded quarterly (which has earned a return on investment (ROI) of 7.14% since its 2000 inception – and Voila! you wake up on retirement morning with a $466,000 balance in your Roth account. This is in addition to Social Security, your work-related 401(k) or 403(b), your home, and all the other assets and retirement savings you’ve accumulated during that same period.

Because folks purchase lottery tickets with after-tax dollars, I assumed a $3,000 initial investment (the required minimum) and the $100 monthly contributions would fund a Roth IRA. In retirement, Roth IRA withdrawals are tax-free. The VG Index Fund’s 7.14% ROI is based on the fund’s returns since its 2000 inception. I made no inflation adjustments. By the way, the Total Stock Market Index Fund has earned, on average, 13.82% over the last 10 years, so  using 7.14% in my hypothetical example doesn’t seem overly optimistic… but who knows?

Food For Thought

Okay, so it doesn’t sound like much compared to $1.537 billion, but think about that $466,000 every time you walk into a convenience store during the next 45 years and throw down a few loose “after-tax” dollars for a lottery ticket. I’ll take the 1:1 chance of ending up with $466,000 upon retirement versus those long odds of being extremely lucky. But remember, to gain these improved odds, you have to be very disciplined… and very patient.

A Bird In Hand

Speaking of the lotto, a quizzical subscriber asked me the following question: If you became a lucky winner and had the choice of taking $50,000 today or $80,000 spread evenly over 30 years, what would you do? And how would you invest the money in either case? In responding to these questions, I assumed that in both cases the money was invested in taxable accounts to avoid muddying the water about who might be eligible to place those winnings in retirement fund vehicles.

As usual, in both cases, my investment choice would be the aforementioned index fund. As to the cash,  I would invest the lump sum assuming an annual return of 7.14%, compounded quarterly, which mathematically would grow to $418,000 before taxes and inflation after 30 years. In the second case, I would invest the larger sum evenly over 30 years (assuming the same yield of 7.14%, compounded quarterly), which mathematically would grow to approximately $312,000. Granted, my approach is very simplistic, but it certainly reaffirms the value of “a bird in hand” even when it’s a smaller bird².

Save A “Real” Million Bucks By Retirement
February 20, 2020

A couple of subscribers I’ve chatted with recently seem to think that if they retire with a million bucks in their retirement account, they’ll be in hog heaven. No doubt, it’s a very comforting figure. But should it be?  I ran a hypothetical calculation for myself assuming I was 28 years of age. Hey, don’t giggle, I’m only about twice that age (if you’ll permit me to use the term “about twice” quite loosely).  I simply want to present an example that at age 28, with a good job, and already having saved $10,000, how much more money would have to be tucked away monthly, invested at 7%, compounded annually, to achieve millionaire status at age 68 (40 years hence).  

More Than Meets the Eye

I grabbed my abacas (Source: Bankrate’s Investing & CD Calculator - Save a Million Dollars Calculator), slapped around a few beads, and Voila! I had my answer. In addition to the $10,000 seed money, I’ll need to invest another $343 per month to reach that million-dollar goal. Seems doable – particularly if I have a generous employer who matches some of my contributions. And there should be nice raises in this mythical future even as my family grows and requires a bigger house, dependable cars and college or trade school educations.

But then I realized that there is more to the calculation than first meets the eye. I forgot to allow for Izzy The Inflation Monster! So, I threw in a 2.5% per year inflation factor to feed that hungry beast who will gobble up as much of my purchasing power as it can during those intervening 40 years.

The Inflation Monster

Using that 2.5% inflation factor, here are the numbers. Beginning with the $10,000 initial investment and adding $343 each month for 40 years, I do end up with roughly $1 million in my retirement account at age 68. Unfortunately, those “gray bearded” million bucks will only purchase $373,300 worth of goods in today’s dollars.

So, I go back to the abacas and bean-count how much more I must save to end up with $1 million in purchasing power at age 68. And boy is that a Zebra of a different stripe! To have $1 million in today’s purchasing power 40 years hence, I will need almost $2.7 million in my retirement account, not just $1 million.

What the...???

To achieve this new goal, it will require a monthly savings of… gasp… $1,020 instead of the $343 I mentioned earlier. But being a “glass-half-full” chap, I desperately try to see the silver lining of this cloudy dilemma. By saving at the $1,020 clip per month, I’ll have about a million bucks sitting in my retirement account by age 55 – a “fat-cat” millionaire 13 years ahead of the original schedule… for whatever that’s worth.

Still, take heart in the fact that although inflation steals an individual’s purchasing power, it also tends to exert upward pressure on paychecks. In short, the higher $1,000 per month savings requirement might be more achievable than one might imagine. Inflation tends to lift all boats… income as well as expenses.

Clear as Mud

But don’t forget, this scenario is hypothetical. Future rates of return aren’t predictable with any certainty (they can vary widely over time, especially for long-term investments like I assumed here). Investments that pay higher rates of return invariably come with higher degrees of risks and more volatility. And to really brighten your day, the loss of investment principal is also a possibility. So, immerse yourself in a bowl of Blue Bell® ice cream and hope that the (also mythical) Social Security trust fund (like so much of the other money we send to politicians) doesn’t soon disappear into that fetid, alligator-infested, Washington D. C. swamp – and for goodness sake, start saving!

By the way, there’s stirrings among political investment advisers about tax-free investment accounts for lower and middle-income families – and they’re not retirement accounts. These accounts would accumulate funds that, after five years, could be used to buy or improve homes, start new businesses, send kids to college or private schools, supplement income after job loss, or yes, even for retirement. It’s an interesting idea. We’ll talk more about it in a week or so.

Who Pays Taxes On Fund Distributions?
February 13, 2020

I detect a bit of confusion among certain of my subscribers regarding who pays taxes on capital gains of stock sold during a given year by fund managers. A couple of folks asked why shareholders had to pay taxes on those gains when the “fund” had already paid them. Well, first of all, the fund hasn’t already pay taxes on those distributions. [To view the video below click here.]

Shareholders Pay

Shareholders of the funds – you – end up with the tax bill. And you pay taxes on those distributions whether or not the distributions are reinvested in additional fund shares or received in cash. To clarify, let’s venture behind the scenes to see what actually happens.

Federal law requires fund managers to distribute all dividends, interest and capital gains to shareholders…and report those distributions to you as they occur, typically quarterly and at year-end for dividends and capital gains… and monthlyfor interest.

Although it’s common – and wise – for shareholders to automatically reinvest distributions in additional shares of the mutual fund, that doesn’t eliminate their obligation to pay taxes on such distributions quarterly or by no later than April 15 of the following year.  In short, shareholders are responsible for reporting such distributions on their next year’s federal tax return and for paying any tax due, when due.

Tax-Deferred Exception

If a mutual fund is held in a tax-deferred account (i.e., a 401(k), IRA, etc.), the rules regarding distributions are different than as explained above. In tax-deferred cases – those funded with pre-tax contributions – with few exceptions, shareholders will be taxed when the money is withdrawn from such accounts – whether voluntarily or as Required Minimum Distributions (RMDs). However if the account is a Roth IRA or a Roth 401(k), shareholders won’t be taxed on withdrawals since those accounts are funded with after-tax contributions. And there’s a different set of rules, maybe even penalties, covering “early” withdrawals, but that’s another story.

Recap: You Pay

To recap, mutual fund entities do not pay taxes on capital gains, interest and dividends earned by their shareholders. That’s a shareholder’s obligation. So, keep detailed records of all mutual fund distributions – and on your own purchases and sales of fund shares. And report these activities without fail to Uncle Grabby.

Remember, the mutual fund company has already reported the distributions to Uncle Grabby on a 1099-DIV. And Grabby’s watching to make sure you, the shareholder, reports those same distributions on your federal tax return.

The Coronavirus Crisis: Could it Infect the Market?
February 6, 2020

Today’s blog takes me down a road less traveled - the discussion of a current event and how it might impact short- and long-term market values and an investor’s response to such an event. Specifically, I want to address the effect of the Coronavirus that reared its ugly head recently in China, and its slow but steady infection of China’s trading partners. (Click here to watch the video below.)

Going Viral?

Investors shouldn’t dismiss out of hand the impact of the Coronavirus virus, in particular, on the Chinese behemoth. That nation has quarantined 56 million of its citizens in an attempt to arrest the virus. To date, investors in the United States seem to be of the mind that the American economy is less vulnerable to external shocks than the rest of the world. There’s an element of truth to that. Still, according to the Wall Street Journal’s insightful editorial staff,  U. S. companies, Apple, Starbucks and other American stalwarts have temporarily closed stores in China for good reason. And Ford, Apple and Tesla have temporarily halted the production of their commodities in China. Of note, one-sixth of Apple’s sales and close to one-half of chipmaker Qualcomm’s revenues are generated in China. And 80% of active ingredients used by drug-makers to produce finished medicines come from China. Such statistics and a random sampling of corporate activity in reaction to this virus are meaningful red flags. Unless the spread of this virus is arrested soon – and normal business activity resumes – markets across the world, including our own, will feel its impact.

Too Big to Ignore

When an economy the size of China’s – the world’s largest oil importer and a major manufacturer – faces a sizable quarantine of citizens, suffers airline service disruptions from many countries and must deal with the closure of international borders and of the aforementioned factories, financial markets there… and here… can’t help but be impacted. China’s loss of 2-3 million barrels per day of oil-related demand alone will be felt worldwide. U. S. crude oil prices have declined over 20% in the last month. Although such price decline could give a boost to motorists at the pump, the Coronavirus crisis is being less than kind to the stocks of major domestic energy companies. Middle East catbird, Saudi Arabia, is advocating a brief curtailment of OPEC production to combat declining demand, a development that would be helpful to U. S. shale producers.

It's Anybody's Guess

Will this virus have a short- or long-term market impact on the world market? That's the question of the moment. Although various flu viruses impact our country on a much greater scale annually, they are familiar viruses. Not so much the Coronavirus, thus, the greater uncertainty surrounding it. My guess is that, due to this uncertainty – the absence of an effective Coronavirus treatment – the world’s marketplaces will experience increased volatility leaning toward bearish declines. In this country, the Centers for Disease Control and Prevention (CDC) and other federal, state and local health authorities are reacting in an expeditious and professional manner – China, not so much. The impact of the virus on that country is still unfolding… yet to be defined. But it seems to finally have grabbed their government’s belated attention. Past outbreaks such as SARS (severe acute respiratory syndrome) caused stocks to drop initially only to bounce back once the rate of new infections slowed. To date, cases of this new virus in China have doubled the number afflicted by the SARS virus two decades ago – a troubling trend.

Take Two Aspirin...

Opportunistic investors holding highly-diversified, well-balanced portfolios can weather this significant market uncertainty by judicious buying in a declining market should it occur, but the word of the day is patience… patience to await the opportunities of a soft market and to outlast it if and when it occurs. Despite our country’s own low risk for infection, China’s outbreak will continue to reduce its energy consumption and disrupt the world’s second-largest economy for some time to come.

To wise investors, steady as she goes.

More Rules For The Tools: IRA Withdrawal Exceptions
January 30, 2020

Generally speaking, an early withdrawal from an IRA prior to age 59½ is a big no-no, subject to being included in gross income plus a 10% additional tax penalty. There are exceptions but avoid them if you can.  

The main concern folks – especially young folks – have with IRAs is their “forever” feature. “I make contributions to the darn thing, and it’ll be FOREVER before I have access to those dollars,” they grumble. Well, sort of true. IRA rules are designed to discourage you from dipping into the till prematurely as opposed to waiting until the greybeard years (post-59½) for access. After all, IRAs are instruments of retirement. But to assuage some of the apprehension related to this “forever” feature are a few exceptions to the 10% additional tax penalty on early withdrawals.


As youngsters mature and adults grow older, they will come to appreciate the benefits, and on occasion, the early withdrawal exceptions of an IRA – the ability to tap the account for certain very specific purposes. Let’s discuss a few, keeping in mind that the exceptions I mention also have some very specific provisos that must be met to avoid triggering that darn early withdrawal tax penalty. Let’s consider a few exceptions:

1. In the event of job loss, you can make early withdrawals to pay for healthcare insurance premiums.

2. You can pay for medical expenses that exceed 10% of your adjusted gross income.

3. If disabled, to qualify as a tax penalty exception, you must obtain a doctor's verification as proof of your inability to do productive physical or mental activity indefinitely.

4. You can pay qualified higher education expenses for yourself, a spouse, and for offspring, but only if paid to eligible educational institutions.

5. You can early withdraw to buy, build, or rebuild a first home for a parent or grandparent, yourself, a spouse and for offspring, but you must meet the IRS definition of a first-time home buyer. If both you and your spouse qualify as first-time home buyers, then each of you can withdraw $10,000 from each of your respective IRAs without penalty.

6. A qualified reservist distribution is not subject to the penalty tax if certain requirements are met, including a call to active duty for more than 179 days or for an indefinite period as a member of a reserve component.

7. The Substantially Equal Periodic Payment (SEPP) rule allows holders to withdraw retirement account money at any age, penalty-free. There are 3 IRS-approved methods for calculating SEPP withdrawals and you must adhere to such schedules for at least 5 years, or until age 59½ (whichever occurs later), or all amounts withdrawn may become subject to the 10% penalty tax.

8. We’ll discuss inherited IRA withdrawals at another time.

I purposely mention these exceptions because so many folks avoid using IRAs using the excuse that they tie up money “forever” that might be needed to meet more pressing current needs. In doing so, these same people overlook an IRA’s tax-advantaged value of saving money for retirement, long-term exposure to an up trending market, and the benefit of The Amazing Power of Compounding.

Before dismissing IRAs out of hand, remember that there are ways to access IRA accounts for specific purposes, but fair warning, the rules covering Traditional and Roth withdrawals are not all the same. Do your homework and think twice before making a withdrawal.

Ah, More Examples

Let’s review some examples of what The Amazing Power of Compounding can do for savers who follow different contribution patterns. A single $2,000 IRA contribution made at age 15 could grow to almost $59,000 after 50 years, assuming a 7% investment yield, compounded annually. If that same saver contributed the initial $2,000 but added an additional $50 each month for 50 years, the account would grow to about $312,000, earning the same 7% per annum. And if the saver doubled the contribution to $100 each month, the account could reach over $565,000 after 50 years. As youngsters “earn” more money after entering the adult workforce, their annual contributions are likely to be higher, and the resultant IRA balance will grow correspondingly. Amazing, huh?

What’s The Point?

Aside from pointing out the withdrawal flexibility of IRAs, another purpose of today’s discussion is that since America has devolved into a “do-it-yourself” retirement system (Defined Contribution Plans) as opposed to the old pension system (Defined Benefit Plans)¹, the so-called “wealth gap” between wise early savers and those who choose to wait has morphed into a “wealth chasm”. Contributing to the chasm is the choice of wise savers to avoid the 10% early IRA withdrawal penalty, a penalty our legislators included when passing laws establishing IRAs and other retirement accounts. The withdrawal message is simple: Follow the rules and reap major rewards – violate them and suffer the consequences.


In summary, teaching our younger generations the value of opening Traditional or Roth IRAs – and yeah, Gramps, occasionally providing matching contributions – helps provide them with a head start on saving for retirement. You can also teach them useful lessons about taxes, smart investing, The Amazing Power Of Compounding, and the very important relationship between earning, saving and spending. Discipline, discipline, discipline is the watchword – so important in developing healthy financial habits.

Finally, don’t be intimidated by the “forever” nature of IRAs. There are ways to access funds in both Traditional and Roth IRAs prior to retirement. Still, IRAs should be funds of last resort to raid, but if the pitcher of life throws you an occasional wicked curve, well…

¹See my archived blog “The Tottering Three-Legged Stool” dated 07-26-2019.

Tools with Rules: Those Fantastic IRAs
January 23, 2020

Because time is money and money buys time, it’s important that Millennials and Gen-Zers begin saving (and investing) early in life in order to optimize The Amazing Power of Compounding. Have I mentioned that before? Let's flesh out a couple of extraordinary wealth-building tools for our youngsters!

Time Is Money

Members of my target generations who are not yet saving have already lost valuable time. Still, as I have pointed out time and again, it’s never too late, but early is best. Almost nothing matters as much in personal finance as deciding NOT to violate the fundamental principle of saving early in life. If you violate this principle, you’ve helped neuter The Amazing Power of Compounding. But enough sermonizing.

Youngsters And Earned Income

Most investors are familiar with Individual Retirement Accounts (IRAs) – and understand that IRAs represent important tools for young investors, who because they are young, can take maximum advantage of time and its supportive co-conspirator, compounding.

Surprisingly, many parents don’t know that youngsters, regardless of age, can contribute to IRAs, but, with rare exception, only if they have earned income. That, of course, is a big “if” especially when paired with a big “maybe” – will a youngster with earned income choose to contribute money to an IRA versus spending it on movies, video games or some early-stage million-dollar habit? More about this later…once we get Grandpa involved.

Both types of IRAs – Roth and Traditional – are suitable for children. Their difference stems from when the individual pays taxes on contributions to the plan. In short, a Traditional IRA is funded with pre-tax dollars, whereas, a Roth IRA is funded with after-tax dollars. Regarding Traditional IRAs, taxes are paid when money is withdrawn from the plan beginning no later than age 72 (at the then-applicable personal tax rate).

The Appeal Of Roth IRAs

In both Traditional and Roth IRAs, money accumulates tax free. But here’s the appealing kicker of a Roth. If and when Roth withdrawals begin decades later, no income tax whatsoever is due. And the Roth is not plagued by Required Minimum Distributions (RMDs) that begin at age 72 for Traditional IRAs – subject, of course, to Uncle Grabby’s IRS rule changes. And he’s capable of that on a whim, re the recent SECURE Act, which curtailed the tax benefits of “stretch” IRAs. Requiring annual payouts from Roth IRAs was not included in this most recent legislation, but what about the next Congressional whim?

Speaking of Uncle Grabby, always be mindful of tax considerations. The contributing child may be required to file a tax return if his or her income exceeds a certain amount. If the child earns less than this amount, he or she will likely be in a 0% tax bracket – and will not benefit from an up-front tax deduction associated with Traditional IRAs. In that case, it makes sense to focus on a Roth, the IRA of choice (in my opinion) for children with limited income.

A Wise Move

As suggested earlier, creating an IRA for an eligible youngster is a wise move. Because of the youth factor, The Amazing Power of Compounding will work its magic over a longer period, and the results will be – well – truly amazing. But remember, the child must keep a Roth until age 59½ for all withdrawals to be tax-free. (Prior to age 59½, Roth contributions, but not investment earnings, can be withdrawn for any reason without tax or penalty under existing Uncle Grabby rules).

Don’t Forget Gramps

In summary, children, regardless of age, can contribute to an IRA if they have earned income. Others (including Gramps) can contribute to the child’s IRA, too, as long as the amount of the child’s earned income is not exceeded. By the way, a minor’s IRA must be set up as a custodial account by a parent or other adult.

Also, there are opportunities to contribute to an IRA without a job! We’ll talk more about that next week.

Does Investing Mix with a Great Depression?
January 16, 2020

I recently ran across a very intriguing question posed by a young chap - a Gen Zer - about the risks of investing. And he wasn't just asking about "typical" risks, like investing in a company's stock that goes bust. He, like many members of his generation, are growing up during an era when they are constantly bombarded with frightening scenarios - real and Internet-produced - that have them living slightly on edge. It seems that he had heard we might be on the brink of another "Great Depression." If so, he asked, what happens to all of the money invested in the stock market?

There are No Dumb Questions

Radio and television personality, Art Linkletter, wrote a bestselling book titled, Kids Say the Darndest Things. The idea for the book was in response to his young son’s comment that he wasn’t going back to school after a disappointing first day in Kindergarten. “Why not?” Art asked. His son, Jack, replied, “Because I can’t read, I can’t write, and they won’t let me talk.”

Youngsters, even older youngsters, often have thought-provoking ways of looking at things… stimulating others to ponder such outlooks. What if another Great Depression comes, wouldn’t all that investing go to waste? Perhaps, but let’s consider the prospect of starting to save and invest while very young. Reminds me of that old adage: The Amazing Power of Compounding. Yeah, I know, you’ve heard me mention it before. But, yes, the younger you start saving and investing, the higher the payoff. For example, if you save and invest $100 per month, earning 7% per annum, compounded annually, here’s the theoretical retirement nest egg you might accumulate by age 65 (before taxes and inflation):

1.    Beginning at age 20, you’ll have $357,867 upon reaching age 65.

2.    Beginning at age 30, you’ll have $173,177 upon reaching age 65.

3.    Beginning at age 40, you’ll have $  79,290 upon reaching age 65.

Now, if another Great Depression does come, wouldn’t you rather be in the middle of accumulating a nest egg of sizable proportions than not? The longer you wait to save and invest the more financially unprepared you are to experience a depression, a recession, or just the ordinary run-of-the mill economic cycles that constantly bombard the marketplace. And in the event of such setbacks, perhaps you could salvage a portion of your portfolio. Assuming you have a good plan, investing is never a waste of time. (Here's the link to the video below.)

Those Disappearing Dollars

As to the question, “And how does our money just disappear anyway?” Well, in order for it to disappear, you must earn it in the first place. And there are a variety of ways for it to disappear. Million Dollar Habits will get you there about as quick as anything. A poor investment plan or strategy can chew up dollars fairly quickly, too. Just plain bad luck often chews up a chunk. And despite following best investment practices throughout your working career, that ravenous old dude, Izzy the Inflation Monster, and his free-spending sidekick, Uncle Sam, are magicians at making your money disappear.

Dwindling Spending Power

Previously, I mentioned that if you began saving and investing $100 per month, earning 7% per annum, compounded annually, you would have $357,867 at age 65 before inflation and federal taxes. But what if Uncle Sam taxed you at a marginal rate of 25%, and what if the inflation rate over that 45-year period had averaged 2% per annum? Taxes would transform your ending balance to $212,516 and the distressing combination of taxes and inflation would reduce your spending power to $87,173.

Well, your $357,867 didn’t completely disappear, but once Sam takes his cut and after being subjected to the ravages of Izzy the Inflation Monster, you are left with an anemic purchasing power of $87,173 in retirement. In short, $4 in savings is reduced to $1 in purchasing power.

Perhaps you should start saving and investing at age 10.

Just a thought.

Your Portfolio’s Beating Heart: The Index Fund
January 9, 2020

Investing is as complicated as we choose to make it. And investors seem to veer in the direction of complexity in their eternal pursuit of ever higher returns.

Why Complicate Things?    

As a younger man, I fell victim to that pursuit, too, and it took several years to find my way out of the forest. Like so many young folks who achieve a bit of success, who now have a few extra dollars to invest, and who credit themselves with investment skills not yet learned or that simply don’t exist, it seems to be part of the maturation process. It doesn’t have to be. The hard part of saving and investing is the saving part. But for the moment, let’s talk about the investing part.

Luck…Or A Plan?

There’s a good bit of luck involved in playing the stock market game. Regardless of the amount of time spent researching, it’s very difficult to predict the future variables that affect even a “can’t miss” stock. In my own case, after years of being both right and wrong judging (guessing) market moves, a very cursory study of my success as an investor became self-evident. On balance, to put it kindly, I was barely breaking even. Not being totally muleheaded, I stopped researching individual stocks and started searching for a better investment strategy. One soon caught my eye – a controversial and somewhat revolutionary new product: THE INDEX FUND (click here to play video).

Bogle: The Small Investor’s Friend

John Bogle, iconic founder of The Vanguard Group in 1974, created the first credible index fund available to the general public. It roared to an most inauspicious beginning. According to Bogle, the fund’s initial public offering (IPO) in August 1976 “may have been the worst underwriting in Wall Street history”. The IPO’s initial target was $250 million. It fell short of that goal by roughly 95%, and for the next decade, struggled for attention. Its results seemed to be attracting more criticism than new investors, but Bogle, being a patient man, believed that the concept could not be long ignored.

Daring To Be Average

Still, a strategy of simply tracking the broad market was almost totally rejected as an investment plan and quickly became known as “Bogle’s folly”. Fidelity’s Edward Johnson scoffed at the thought that most investors would be satisfied with receiving average market returns (I call it "Dare to be Average") on their fund investments. Bogle’s feeling was the exact opposite, that index funds could provide investors, large and small, with the most effective stock market strategy of all time.

In his mind, the strength of the S&P 500 Index investment strategy was to buy a broad stake in American business and hold it forever. And because it was a passive investment requiring little management, it could be held long-term at a very low cost. In short, index fund owners would become that rarity among investors – long-term owners of stock, a valuable counterweight to the prevailing view of most market participants. And that this countervailing market force could be enormously important to small investors as well as to society in general.

John And George

In my mind (an oil industry graduate), John Bogle (who died January 16, 2019) was the personal investment industry’s George Mitchell. To those not familiar with George, he was Mitchell Energy’s CEO – a long-time wildcatter whose tenacity reordered the world’s energy dynamic by insisting that crude oil and natural gas entrained in rock could, indeed, be economically recovered. Every time you pull into a gas station, you should thank George for his stubborn streak. And every time you check your Roth IRA balance, thank John Bogle for his own brand of stubbornness.

Bogle, like Mitchell, was a man of vision who thought outside the box. Those studies I mentioned earlier kept revealing an unsettling result to the staid investment industry’s active manager proponents. Low-cost funds kept winning the “yield war”, which began to dispel the collective Wazoos’ notion that investors must pay more to get more…the antithesis of Bogle’s notion “that investors as a group not only don’t get what they pay for, they get precisely what they don’t pay for.” Without question, part of the out-performance of index funds is directly attributable to their lower operating expense ratios. In short, indexing’s low-cost effect means the investor keeps more of what his or her fund earns.

According to Vanguard studies, from 1976 to 2016, indexing saved investors close to $153 billion!

Believe The Numbers

It’s true that 20 percent or so of the managed (active) funds outperform index (passive) funds on an annual basis, but it’s seldom the same 20 percent!

Today, broad market index funds modeled on the original Vanguard fund rule the roost, a general recognition that Dare to be Average has become a more commonly accepted practice among small savers in the investment community. This is why it plays such an outsized and important role in this blog’s strategic model.

I’m not suggesting that you invest exclusively in Index funds. I am suggesting, however, that small investors new to the game use an index fund strategy around which to build a portfolio based on those PDQ Principles – Patience, Diversification and Quality – that I talk so much about. And keep it simple.

Financial Fairy Tales Can Come True (But They Need Some Pixie Dust)
January 2, 2020

The latest dream (occasionally realized) among millennials is to become financially independent and retire early (a movement called FIRE) – a dream about retiring before or by age 40. As I understand it, the plan is to retire from a 9-to-5 regimen, but not to quit working. In short, these folks want to spend the rest of their post-40 lives doing what turns their crank. Of course, this kind of independence from the grindstone requires money. It can be done, but because it does require money, it also requires a huge dose of discipline at a very early age – an ingredient missing in the makeup of many people, including I suspect, quite a few of these potential FIRE devotees.

The “Earned Income” Bugaboo

The easiest path, of course, is for a Millennial or Gen-Zer to carefully select his/her parents. I know! I know! I’m being a bit facetious here, but stick with me. These parents don’t have to be super-wealthy (like, Bill and Melinda Gates wealthy) or even Wall Street or Hollywood rich. However, having financially secure parents who possess an entrepreneurial spirit might help. After all, wouldn’t it be advantageous to have parents who could provide opportunities for kids to generate $6,000 per year (in after-tax income) to fund a Roth IRA – quite the challenge in my rather blithe example since the kid must have the means to generate real “earned” income.

Note to parents: Gifts don’t work. In short, the kid must generate his/her own income, file a federal tax return, and pay tax, if due, on the net earnings.

While we're talking IRAs, here's my synopsis of the SECURE Act recently passed by Congress. As of Jan. 1 of this new year, there are new rules and regs that affect the IRA funds you bequeath kids and grandkids.

Installing Discipline

What, you exclaim? A baby…a preteen…a teenager earning those kinds of bucks? That’s why I mentioned entrepreneurial parents. It’s not out of the question. If, for example, the family owns a business, they might hire the kid to appear in commercials until said kid can perform other tasks for the company – or for third parties. By the way, an advantage to the family business is that the kid’s income is tax-deductible and more than likely taxed at a kid’s lower rate.

Part of the discipline I mentioned earlier is that the parents work hard at instilling in their kid a “savings mindset” such that the kid will continue setting aside $6,000 (the 2020 IRA limit) of their annual earnings for a Roth contribution. This is important because, as the kid matures, he/she will be able to earn larger amounts of net income, and hopefully, will want to continue to contribute $6,000 of this income stream annually to the Roth IRA.

A Fairy Tale Example

Now, I know my “parent selection” example is farfetched (after all, it is a fairy tale), but where there’s a will, there’s a way. One thing that works in parents’ favor is a constantly swelling account balance in the child’s Roth IRA. Let’s throw out some fairy tale numbers befitting our fairy tale example, which assumes an annual $6,000 contribution (beginning at birth). Let’s invest it in a Vanguard Total Stock Market Index Fund and further assume a 7% annually compounding rate of interest going forward. All things being equal, this plan will produce $260,500 after 20 years, $1,312,400 after 40 years, and $7,919,400 after 65 years (in each case before inflation). And because this is a Roth IRA, no taxes are due on all distributions from the account (once a kid reaches retirement age). But beware of certain withdrawal penalties that come into play prior to reaching age 59½.

Compounding…A Wonderful Thing

Aside from producing over $1,000,000 by age 40, my example also demonstrates The Amazing Power of Compounding, the “greatest force in the universe”, according to math genius, Albert Einstein. Additionally, it demonstrates the importance of my own PDQ Principles…Patience, Diversification and Quality…and a little bit of parental luck-of-the-draw. Not one in 10 million families will follow this fairy tale example using good and valid excuses, but why agonize over the loss of $7,919,400? It’s only money (and a stress-free retirement).

My fairy tale point is this, a kid has the advantage of time over adults. For this simple reason, even less than maximum contributions to a Roth can expand exponentially due to exposure to The Amazing Power of Compounding for a long period of time. And youngsters who receive parental encouragement to save (like I did) are more likely to develop good financial habits – habits that increase their future chances for financial stability.

In a future blog, I will present a more age-specific and detailed version of how to use a Roth IRA to build wealth for kids. A version that fits my blog’s primary premise: Because time is money and money is time, it’s crucial that young people start saving (and investing) early in life to optimize The Amazing Power of Compounding. Little else matters in personal finance until we learn not to violate this fundamental principle.

Fair Warning

Fair warning to parents who don’t encourage their kids to save and to develop good financial habits. In 2017, $86 billion of student loan debt was owed by Americans aged 60 and over (Source: TransUnion). Some of this debt resulted from older folks going back to school for retraining in the wake of the recent Great Recession. But much of it resulted from parents taking out loans to help pay for their kids’ college expenses.  

It’s now timely to replace my rather far-fetched fairy tale scenario with a big dose of reality. Which means it’s time, in future blogs, to take a harder look at Index funds and those fantastic IRAs mentioned in this and previous blogs.

The Great 2019 Christmas Heist: Congressional Grinch Targets IRAs
December 26, 2019

Happy holidays! I hope you spent the last few days exactly as you wanted to - with family and friends, holidaying or relaxing, or even working if that is what brings you great joy! WynnSights just celebrated six months of life on Christmas Eve so I want to take this opportunity to thank everyone who has set eyes on this blog, whether it be once or several times, because you are what really brings it to life! If you ever have an idea for a blog post, or a question or subject you'd like me to explore, please email me and I will do my best to oblige!

Now...I am sorry to switch the mood from joyful to somber, but I would be remiss if I did not share and comment on breaking news in the IRA world. Here goes...

The So-Called SECURE Act

Last week Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act that made several changes to retirement account rules. And as the old saying goes, Congress giveth and Congress taketh away. Their year-end spending package will limit a very popular feature of traditional and Roth IRAs – the ability of savers to extend the life of their retirement accounts by leaving unspent balances to much younger heirs (e.g., grandchildren).

The reaction of a somewhat irritated grandchild upon hearing about the SECURE Act.

Whoa, That Soon?

After December 31, 2019, certain young heirs will no longer be able to take required withdrawals over their lifetimes, greatly limiting the time they can receive tax-free or tax-deferred compounding. Beginning in 2020, many heirs must withdraw inherited IRA assets within 10 years rather than based on their own life expectancy (called “stretching”).

Thanks, Kevin

Even top Republicans, many on the House Ways & Means Committee, including Kevin Brady of Texas, supported this heist. Brady’s reasoning (summarized): Tax-favored retirement funds should be used for the owner and spouse’s retirement security, not as wealth succession management tools.

Don’t you love it when Washington politicians tell you how to plan your financial future, and then change their mind on a whim? Most graciously (sarcasm), they exempted surviving spouses from this revision of the rules – rules that will highjack certain affected IRA beneficiaries of an estimated $16 billion… call it a tax increase if you’d like… over the next decade (Source: Joint Committee on Taxation).

Happy New Year! (It's a Congressional election year, by the way!)

Roth IRAs: The Gift that Keeps on Giving
December 19, 2019

You may recall my August 2019 blog titled “Hypothetical Henry” in which we discussed the benefits of establishing a 529 account for the educational benefit of children and grandchildren. In that blog, I also mentioned that a youngster with earned income might consider opening a Roth IRA retirement fund. Then again, the kid might prefer to utilize that earned income in ways other than for IRA contributions (yah think?). Well, Gramps, it’s the Christmas season… a time for giving. What better opportunity to discuss the subject with your “employed” grandkids… to create Roth IRAs by offering to make the annual contribution or to match any contributions the kid(s) make. Who knows? This benevolence just might gain their short-term awareness despite its long-term implications.

Of course, your total contribution can't exceed a given grandkid’s earned income – or the tightfisted IRS’s annual limit, whichever is smaller ($6,000 in 2019 and also in 2020). In any event, Gramps might consider “matching” up to his grandkid’s earned income amount, effectively making the IRA contribution himself (i.e., if the grandchild earns $6,000 at a qualifying summer job, Gramps can offer to let the grandkid spend his or her money on other things while Gramps contributes a portion or all of the $6,000 IRA contribution limit using his own funds). The IRS doesn’t give a hoot who makes the contribution so long as it doesn’t exceed the child’s qualifying earned income for the year. By the way, those matches are additive to Gramps’s annual gift exclusion limits.

A Grandparent’s Objective

WynnSights' objective is to incentivize grandkids to start saving and investing for the long-term while still young. In short, to develop the discipline to “save and invest early and often”. The ultimate reward can be huge. And Gramps, if you’re able, contribute the total allowable amount. If not able, be as generous as possible with your match. For example, if the grandkid has $6,000 in earned income but only wishes to contribute $2,000 to a Roth, Gramps can match the grandkid’s contribution 2:1 and still stay within the child’s earned income limit and those restrictive IRS rules.

Watch That Money Tree Grow

Although saving for retirement is likely the last thing on a youngster’s mind, most grandkids will find it intriguing that a small investment today can grow into a rather sizable nest egg later. Without instruction, grandchildren might not  immediately understand the concepts behind compounding, but they will likely appreciate the fact that their Roth IRA balance is growing. It never hurts to provide examples of the Amazing Power of Compounding – how even small contributions can mushroom into large numbers over time. One tight-fisted Grandpa I know contributes $2,000 per year to each of his kids and grandkid (for 25 years in the specific case of the oldest). Let’s assume in the oldest child’s case, that the $2,000 per annum has earned 7% per year compounded annually to date and will continue to do so for another 20 years. What will it be worth at the end of 45-year period (assuming Gramps hangs around those last 20 years)? A cool $693,000 before inflation… not a bad series of Christmas gifts from the old dude. By the way, since a Roth IRA is a retirement account, income levels could affect contribution amounts along the way. Teenagers aren’t likely to reach those high-income thresholds early on, but later in life they might.

Other Pluses

Aside from watching the money tree grow, Roth IRA earnings over the long-term will never be taxable, Roth assets are protected from creditors with a few narrow state-specific exceptions, there are no RMDs (required minimum distributions) later in life, and those “compounding” benefits associated with early contributions can be substantial at retirement. These pluses, of course, assume that Congress keeps its mitts off existing IRA rules and regulations during future legislative sessions¹.

Caveat: Those Darn Minuses

By the way, when an adult opens an IRA account for a minor, it must be in the child’s name as well as in the name of the adult custodian (parent, grandparent or guardian), which introduces certain disadvantages and risks. At age 18 that child or grandchild would gain full control of the Roth IRA and might decide to…shall we say…dip into it. Should such early withdrawals occur, the cumulative annual contributions can be withdrawn first with no tax or penalty. After that, all subsequent investment gains withdrawn would be taxable to the child or grandchild, and subject to early withdrawal penalties if they don’t meet certain IRS “qualified distribution” standards.

In Summary

Aside from those previously mentioned pluses, the value of teaching your children and grandchildren the importance of saving, the basics of investing, and the discipline to leave a quality portfolio (think low-cost, highly diversified index funds) undisturbed until retirement cannot be overstated. What better way to contribute to your progeny’s future financial well-being than by creating and donating to their very own Roth IRA – accompanied with the reasons why you’re doing it.

As I’ve mentioned in prior blogs, according to that gifted intellect, Albert Einstein, the greatest invention in human history was… you guessed it… compound interest. Try it on for size!


¹Current legislation zipping through Congress concerning the future of the “stretch IRA” has massive support (the existing IRA strategy permits non-spouse beneficiaries to “stretch” out RMDs based on their remaining life expectancy after inheriting the IRA, which extends the life of the IRA by continued, tax-deferred growth even after the death of the original owner. The younger the inheriting beneficiary, the lower the RMD, which means more assets remain in the account sheltered from taxes). Eliminating the “stretch IRA” would mean a higher tax bill for non-spouse beneficiaries; thus, the massive Congressional support.
Let's Talk About the Hidden Costs of Investing
December 12, 2019

Because it can be so consequential to your long term financial health, I want to dedicate another blog to demonstrating the impact of paying too much for mutual fund annual operating expenses. What may seem immaterial in the short run can cost you big bucks over the long haul. If you are have trouble playing the video below, you can access it through this link: https://youtu.be/A0AIcy7xeNwhttps://youtu.be/A0AIcy7xeNw

Fees...and Wazoos

Jack Bogle, the now deceased Vanguard icon, was known for his famous utterances, among them, that Vanguard’s fund owners and others benefit from “getting what they don’t pay for”. To point out the significance of this statement (using Bankrate’s Mutual Fund Fees Calculator), let’s measure the cost of Vanguard’s average expense ratio, currently 0.11%, against the industry’s 0.62%  average, and determine its impact on a 30-year, $100,000 front-end investment yielding 6%.

To summarize how Wazoos can fleece you over time, after investing $100,000 for 30 years at 6% and while paying .11% vs .62% in average annual operating expenses, the hypothetical Vanguard investor would end up with over $79,000 more of value in his/her account by saving $37,000 in fees. This savings would allow the Vanguard investor to earn an additional $42,000 by avoiding the opportunity cost associated with those fees. Over the long haul, fractions of a percent do make a difference. Better to have the difference show up in an investor’s account than in a Wazoo’s wallet. Reminds me of the old saying, “Watch the pennies and the dollars will take care of themselves.”

No wonder the late Mr. Bogle is given credit for savings billions of dollars for millions of large and small investors who are now taking advantage of the lower fees he forced on the financial industry.

Don't be a Lazy Investor

By the way, another “opportunity cost” we often impose on ourselves is keeping too much cash in non- or low-interest-bearing bank accounts or with those certain brokerage firms paying next to nothing. It’s estimated that $9 trillion lounge in such accounts paying about 0.09% or less (Source: Crane Data). A quick check of my Vanguard Group taxable Federal Money Market Fund revealed a YTD yield of 2.11% as of 12-11-2019. This spread between what banks and money funds pay is in a constant state of flux so keep an eye on it.

Free Trading is not Free    

The latest “fad” among many of the brokerage firms (Schwab, TD Ameritrade and E-Trade come to mind), is called free trading. It ain’t free, folks. Many of those firms who advertise free trades make up the difference by sweeping customer cash into lower yielding deposit accounts, investing it at a higher rate for their own account and keeping the spread. In fairness, a couple of the big boys don’t participate in this sleight of hand…Fidelity and Vanguard. Their retailer accounts’ idle cash is swept into higher yielding money market accounts, benefiting their investors.

A Word of Caution

Of note, money market mutual funds (short-term securities whose value fluctuates very little) aren’t backed by the government, while bank savings accounts are federally insured against loss, generally up to $250,000.

The Case Against High-Fee Mutual Funds
December 5, 2019

Despite a major shift by mutual fund providers in recent decades to low-fee options, a surprising 21% of all U.S. Large Cap funds still have expense ratios above 1.5% (source: Morningstar, Inc.). Notably, many of these same high-fee funds also have elevated levels of risk and a portfolio turnover of double the low-fee options. High portfolio turnover invariably leads to higher tax bills associated with the inevitable increase in short-term capital gains.

I Pay Fees?

According to a survey by the Investment Company Institute, a fund trade group, 22% of households that own mutual funds said the fees and expenses they pay “are not very important” or “not at all important”. In a study commissioned by the US Securities and Exchange Commission (SEC), 25% of investors said they didn’t even know which types of fees they pay (while 20% said they didn’t pay any fees at all – yeah, sure). I shudder when I read tidbits like this. And I’ll show you why using some examples.

Studies indicate that investors – busy… or apathetic – seldom get what they pay for when buying “high-fee” mutual funds. A January 2019 Wall Street Journal  article by Derek Horstmeyer, an assistant professor of finance at George Mason University’s Business School, sheds light on the detrimental long-term costs of high annual expense ratios (expense ratios are the annual fees expressed as a percentage of assets under management) that accompany many actively managed mutual funds – expense ratios often associated with “some of the worst performing, most poorly managed funds especially in the U.S. Large and Small Cap Fund categories”.

High Fees: Worth the Cost?

Although that “increased” annualized yield for investing in a low-fee fund (one charging less than 1.5%) versus a high-fee fund (over 1.5%) is largely an across the board phenomena, it is particularly noticeable in the U.S. Large Cap category. Over a 10-year period through the 3rd quarter of 2018, the high-fee category delivered an average annual return of 10.61%, after expenses, while the low-fee option delivered 12.26%, a positive difference of 1.65% percentage points.    

The underperformance of high-fee funds was even more pronounced when considering the category of funds charging a ratio of 2.0% or more. In this case, the 10-year high-fee fund yield fell to 10.01%. The underperformance of high-fee funds impacted other asset classes, too, but to a lesser degree. In the case of U.S. Small Cap stocks, the average 10-year overperformance of low-fee funds was .73% points and for International Equity funds, 1.10%.

And The Dollar Cost Is…?

To illustrate the potential financial penalties associated with high-cost funds, let’s use a simple hypothetical of a high-fee investment of $10,000 increasing at an annualized rate of 5.35%, compounded annually during a 40-year career. After 40 years, the initial onetime investment of $10,000 would be worth about $84,000. Using the same assumptions but changing the annualized rate to 7.00% (to reflect a reduced fee of 1.65%),  the low-cost fund would be worth over $160,000 after 40 years, a dollar improvement of $76,000… almost double the high-cost fund. As noted earlier, that 1.65% improvement in yield (due strictly to reduced fees) during a 40-year career can be really significant.

Vanguard’s founder, John Bogle, often said, “The grim irony of investing is that, as a group, investors not only don't get what they pay for, they get precisely what they don't pay for." In short, every dollar you save by investing in a low-cost, unmanaged index fund is a dollar of return that benefits you, not some fund manager.

Burning Free Money

To ignore the realities of investing in high-fee versus low-fee mutual funds is a mistake as egregious as not optimizing a 401(k) plan employer match (FREE MONEY) at your workplace. I wouldn’t call such an action foolhardy, but I will be so bold as to call it a bullheaded pursuit of a costly million-dollar habit.

My motive for pointing the Horstmeyer study to a wider audience is purposely transparent. It’s another incentive to build a portfolio of funds around a low-fee, broad market index fund – or perhaps, simply stick with an all-index fund portfolio.

In any case, always try to invest at the lowest possible cost.

The Answer to the Million-Dollar Question
November 21, 2019

By eliminating what I call Million-Dollar Habits, (e.g., failure to exercise spending discipline, smoking or vaping, excessive dining out, etc.), almost all of us will rediscover a few dollars we didn’t know we had – enough dollars, at least, to initiate a meaningful savings program in advance of when most people start saving.

Good Will is Not Bad

Shoot, I’ve had astute but cash-strapped young couples – particularly those with new babies or those buying odds and ends for apartments or first homes – tell me they easily save $100 a month by shopping at Goodwill. Not interested? Try it, you might like paying 10-15 cents on the dollar for virtually new items (toys, baby clothes, kitchen items, knickknacks, etc.).

The Savings Ingredient

The savings ingredient in investing is simple, yet critical. If you don’t start saving early in life, you miss the cornerstone of what makes The Amazing Power of Compounding amazing (for a more detailed explanation of compounding, go to my blog titled Before You Get Rich You've Got to Master the Basics). To demonstrate your potential loss, let’s resurrect my stale old example of saving $100 per month, investing it in a Total Stock Market Index Fund (hopefully in a Roth IRA), earning 7%, compounded quarterly, for 45 years. What does it get you? Close to $380,000 before inflation upon retirement. And that’s in addition to Social Security, your 401(k) and other shrewd investments you make along the way.

By the way, you’ll soon learn that I stress simplicity throughout my blog postings, but let’s be quite clear about simplicity. The simplest things in life are very often hard to do. And saving early and often is one of them. You’ll quickly learn why if you haven’t already experienced it.

Ah, Those PDQ Principles

In an early posting on my daughter’s blog, I introduced those very clear, very simple, very basic principles that I try to adhere to in my own investment program: the PDQ Principles. These principles hold to yet another important principle – that most successful investors are also reliable savers who adopt an investment strategy that combines patience with a portfolio of diversified, quality assets, and then dare to be average! I will devote a later, more detailed blog on daring to be average, where the term is applied only to investing. And, of course, the PDQ Principles strategy, like all savings strategies, requires discipline.

The Wazoos (Proceed With Caution)

Humankind tends to complicate things far beyond what is usually necessary. Complex strategies are mostly devised by a group of folks I endearingly call the Ivory Tower Boys (Wazoos) who help the average small investor not one whit! And it’s the “small investor” I want to help, a category that includes me. This green eye-shade, Wall Street crowd devises complicated strategies to convince you that you need them to uncomplicate what they’ve creatively complicated. Granted, complex fortunes (the billionaires among us) require greater sophistication, but most of us don’t have complex fortunes. We save a few bucks a month to invest somewhere that, hopefully, over time will grow into a meaningful retirement fund. And the process does not have to be complicated. In fact, it can be quite simple…the simpler the better.

Don’t be fooled by all the bulls**t. And those green pastures (the internet) are littered with that commodity. Some facts are good to know, but you don’t have to possess a full vocabulary of buzzwords. Join me in this effort. Toss most of this recently digested hay aside, adopt a few basic principles of saving and investing, and over time, you will accumulate a nice nest egg for retirement. And yes, you do have the time. Question is, do you have the discipline? All it involves is spending less (saving) by simply delaying gratification – and avoiding those Million-Dollar Habits.

Buy the Haystack

To sum it up, let me quote the small investor’s dearly departed friend and Vanguard founder, John Bogle who said, “Beating the market is a zero-sum game for investors. Money managers, as a group, must provide the market return, but that return comes only before their exorbitant fees, operating expenses, and portfolio turnover costs are deducted. The zero-sum game before costs becomes a loser’s game after costs.”  

In his highly publicized support of index funds for the little guy, Bogle also wisely counselled, “Don’t look for the needle in the haystack. Just buy the haystack.”

The Recipe for Investment Success: Time, Money…and Discipline
November 14, 2019

I have repeatedly stressed the importance of three basic ingredients of saving for investment: time, money…and discipline.

The more time you spend saving, the greater your potential reward. That comes as no surprise. And the more money you save, the greater your potential reward. But without discipline, the simple act of tucking money into your savings account every single month, you WILL fail to achieve your optimal goal.

That’s not a criticism, that’s just a fact.

We’re addressing two very important concepts here: (1). The Time Value of Money and (2). The Amazing Power of Compounding – concepts that are inextricably linked. Let’s use a simple example. If you save $100 per month for 45 years and hide it faithfully in a can buried in the back yard, you’ll end up with $54,000 at age 65, a tidy sum. However, if you save $100 per month and invest it in a low-risk, tax-advantaged investment account (a Roth IRA) paying 7%, compounded monthly for 45 years, you’ll end up with $384,000 at age 65.

Money held as cash, uninvested, has no worth beyond its moldy face value regardless of its time spent in the can (I could mention that it actually loses purchasing power due to Izzy the Inflation Monster but that’s a blog for another day). The same money invested at 7%, compounded monthly for 45 years clearly indicates The Amazing Power of Compounding over time. That’s why discipline is so important in any saving and investment strategy.

Save early, save often, do it without fail, and do a good job of investing it wisely.  And please…please…avoid dipping into the till along the way.

Before You Get Rich You've Got to Master the Basics
November 7, 2019

During my previous blog posts, I’ve used terms and phrases that require some definition and clarification. Yes, you’ve heard them before, but I want to focus your attention on their importance in developing and carrying out a personal finance plan. I’ll list them in alphabetical order (ignoring the pronoun “The”).

The Amazing Power of Compounding

Most financially successful people get that way not through business innovation but by optimizing compound interest on their savings and investments. An important lesson they learn early is that a saver can contribute less now than more later to enjoy the same ultimate accumulation of wealth. A simple example: If a 22-year-old invests $1,000 on January 1 at 7% per annum, next year the investor will have $1,070. The following year, the investor will theoretically gain the same 7% on the initial $1,000 plus the $70 earned last year, which would increase the investor’s balance to $1,145. In 10 years, the investor’s initial $1,000 would grow to $1,967. Upon retirement, at age 65, that single initial investment of $1,000 will have grown to $18,344. Alternatively, to achieve the same nest egg of $18,344 at age 65, a single initial investment at age 32 would need to be $1,967. The magic came from reinvesting the principal plus earned interest every year.

Dare to be Average

Next to saving, one of the hardest thing to accomplish as an investor is daring to be average. It’s an index fund’s essence, its overriding fundamental. Think about it, if you invest in a Total Stock Market Index fund, or less broadly, an S&P 500 Index fund, you’ve deliberately chosen to be satisfied with  a broad market yield. “Why,” you ask, “would I want to just be average?” Truth be told, you’re not just being average. Study after study of index (passive) fund results show that over time, they outperform managed (active) funds. And those managed funds that outperform index funds represent a moving target from one year to the next. In short, here today, probably gone tomorrow.

Beating the market is hard to do. Accounting for what’s known as “survivorship bias” (the attrition rate of poor performing mutual funds), over a very recent 15-year period, roughly 92% of large-cap funds lagged the yield of a simple S&P 500 index fund. Mid-cap and small-cap funds lagged their benchmark indexes even more: roughly 95% and 93%, respectively. In other words, the odds that you’ll do better in an actively managed domestic fund (versus an index fund) are about 1 in 20. That’s why I dared to be average years ago! Certain “friends” told me that, in my case, being average probably came naturally.

Dollar Cost Averaging

An investment technique that involves buying a fixed dollar amount of shares of stock or units of a mutual fund on a regular schedule (say, the 15th of every month), regardless of the share price on that date. In short, the investor purchases fewer units or shares when prices are high and more units or shares when prices are low. A side benefit is that it just might reduce the inclination of an investor to make purchases in a frothy market or sales in a bearish market.

Million-Dollar Habits

Behavior patterns that, if not modified or completely corrected, could wind up costing an individual hundreds of thousands if not millions of dollars over a lifetime. The most commonly abused such habit is Impulse Buying (more about impulse buying later).

Rule of 72

The one-step formula used to estimate the number of years required to double invested funds at a given annual rate of return (i.e., if an investment promises an 8% annual compounded rate of return, it will take about 9 years to double the invested money (72/8 = 9). The Rule of 72 applies to cases of compound interest, not to cases of simple interest (see below). Alternatively, if you divide the number of years (within which you want to double your money) into 72, the result is the approximate yield you’ll need to earn to achieve your objective (72/9 = 8%).

The Safe Retirement Withdrawal Rate

A calculation of how much an individual can  “safely” pull from a retirement portfolios on an annual basis without significant risk of long-term depletion. Fair Warning: you’ll get about as many answers to the “safe” withdrawal rate as the number of people you ask the question.

Saving: It’s Never Too Late, But Early Is Best

This simple maxim is attributable to those wise parents and financial planners among us. In any event, because Time is Money, it’s always wise to start saving as soon as possible… not when you’re hired part- or full-time right out of high school or college, but RIGHT NOW!

Simple Interest

Used for calculating interest on investments where the accumulated interest is not added back to the principal (i.e., multiply the principal amount by the daily interest rate and by the days that elapse between payments). Yeah, I know, you learned that in grade school.

Time is Money

This simple maxim is often attributed to the wise and witty Benjamin Franklin. He reinforced its meaning by simply stating that if a person skips half a day of work, he forfeits half a day of wages. Let’s apply this maxim to a delinquent saver using The Amazing Power of Compounding above. Had our saver waited until age 40 (instead of age 22) to start saving, to reach the same goal of $18,344 at age 65, he would have to make an initial contribution of $3,380 instead of $1,000. In short, if you don’t start saving until later in life, your required initial contribution will necessarily be larger to reach the same goal at age 65.

The Time Value of Money

This simple concept recognizes that cash in hand is worth more than the same amount of cash received a year from now. Why? Because cash in hand can be invested to earn income during that year (not sure how that applies to birds).

Uncle Grabby

The U. S. Treasury Department’s Internal Revenue Service and its impulse buying sidekick, the U. S. Congress.

Watch the Pennies and the Dollars Will Take Care of Themselves

Another maxim often incorrectly attributed to Benjamin Franklin (and frequently used by my father), but first coined by William Lowndes, a long-ago Secretary to the Treasury of Great Britain who used pence and pounds. Impulse buyers might keep this old maxim in mind while shopping.


Those intellectual, highbrow, disdainful investment advisors who attempt to convince us that investing should not be simple; that they alone can introduce order to the market’s chaos with their complex investment theories.

Your Age in Bonds Rule

This simple rule of thumb states that whatever your age is should dictate the percentage of your portfolio that should be in fixed income (bonds). The rest would be in equities (stocks). For example, a person aged 65 would have 65% of his/her retirement portfolio allocated to fixed income (bonds). I’m not completely sold on this formula because it exposes investors to the ravages of Izzy the Inflation Monster. There will be an upcoming blog on the long-term impact of inflation on saving for retirement. You’ll be surprised how damaging it can be.

Start Saving in Your 20s and Retire a Millionaire
October 31, 2019

The average family only saves a little more than a $100,000 or so by the decade leading up to their retirement.

When you associate that number with the fact that 50% of all individual Americans age 65 and older have annual incomes in the range of $24,000 – far less than what most need to meet living and healthcare expenses – it’s reason to wonder how they plan to financially navigate the 10-20 years many will spend in retirement.

A Gentle Reminder

In last week's blog - "Excuses for Not Saving in Your 50s" - I mentioned various options that delinquent non-savers might pursue to bridge the gap between a “no worries” and a “high stress” retirement resulting from a lifetime of deficient personal financial management. Today, I want to remind my readers, particularly the young ones, that there’s a better way. One that, in conjunction with an increasingly unstable Social Security program, should provide a more secure retirement (85% of Americans 65 and older draw Social Security that ultimately will require some political attention to ensure its long term availability).

Start Saving Now

The key to a secure retirement is not rocket science. You need a plan. And it’s never too late to develop a plan but right now is best. I’m talking in your 20s; certainly no later than your 30s. And build that plan around a simple set of principles – the PDQ Principles come to mind…Patience, Diversification and Quality. But first you must save. Once you develop the habit of saving on a routine and consistent basis, then you apply these principles.

As I’ve stated ad nauseum, keep it simple. Build your portfolio around a low-cost index fund (S&P 500, Total Stock Market, etc.). Such a fund automatically provides you with diversification and quality, and a steady and routine savings habit necessarily embodies patience. And remember, you need to employ all three principles together. Now, let’s provide a simple example that demonstrates both The Amazing Power of Compounding and the importance of Daring to be Average (an index fund, in essence, yields the market rate of return…no more, no less) .

Another Boring Example

Let’s assume that you’re a 25-year-old high school or college graduate that earns $50,000 per year; that you save 10% of your after tax salary – about $400/month; that you create a Roth IRA and invest in a Total Stock Market Index Fund; and that the fund earns 7% per year, compounded quarterly for 40 years. Using a Bankrate calculator, upon retirement at age 65, your Roth would be worth $1 million before inflation. To demonstrate the amazing power of compounding, using the foregoing numbers, had you deposited the money in a bank account earning a fraction of 1 percent, you would have ended up with less than $200,000.  

The Point Of This Exercise

Everything discussed in this blog is “old hat”. We’ve been down this road before. My point is simply this. Based on statistics year-in, year-out, folks keep arriving at retirement’s doorstep financially ill-prepared for 10-20 years of retirement living. There’s a better way.

My example is strictly hypothetical, but it’s a gentle reminder that, while young, with a bit of prior planning and by developing a few good habits (no, not those million-dollar spending habits), an individual can enter a “stress-reduced” retirement phase of life simply because of good financial planning.

Try it. You might like it.

"Excu-u-use Me" Series: The Fearsome 50-Somethings
October 24, 2019

I’ve spent three recent blogs discussing the various excuses made by the 20-, 30-, and 40-something age groups for not sufficiently saving for retirement. I now introduce the reasons that 50-somethings don't save and what it means for them if they only have $100,000 or so socked away right before their 6th decade of life - with retirement right around the corner. I'll pause here while you watch the video that features those excuses...

Beyond the Excuses

As mentioned, for the most part, the average family had socked away little more than a $100,000 or so by the decade leading up to their retirement. And how inadequate that sum of money would likely be – in combination with Social Security – to navigate perhaps the 15-30 years many folks will spend in retirement. So what do these delinquent non-savers do to bridge the gap between a “no worries” retirement and one filled with the stress and strain emanating from poor financial management during those earlier years?


The first thing that pops into my head is to suggest that these “late savers” keep working beyond the normal retirement years. Some folks do this anyhow because they enjoy what they do and have no desire to hang up their spurs. But so often, these are the very people who do not need to continue working. In any event, to keep working is a choice many people will have to make. That’s assuming it remains a viable option. Studies show that over half of retirees actually quit working earlier than expected because of ill health, layoffs, or the development of unexpected responsibilities such as taking care of elderly family members. The list of reasons forcing early retirement are many and seldom anticipated. As insurance against the unexpected, a backup plan to the “work option” is always wise.


It’s not uncommon for those with inadequate savings to enter the retirement years  saddled with a mortgage on their home. A home in which they raised their family, but an empty nest that is now too large for an aging couple or a surviving spouse. And even if a mortgage no longer exists, upkeep and property taxes continue to take an outsized bite from those Social Security checks and what little income (or some small portion of the principle) their savings produces. Still, downsizing can often reduce the carry on a home both in maintenance costs, utilities and property taxes – unless the aging seniors suffer the misfortune of living in an area where a newer, smaller home can cost as much as a larger, older home. In short, downsizing is not foolproof, but it’s an option particularly when one considers that age and/or infirmities ultimately become factors in caring for a home. And remember, those savings resulting from downsizing, like yields on investments, compound over time.

Debt & Expense Reduction

While speaking of mortgages, folks approaching retirement with inadequate savings should pay particular attention to debt (and living expenses in general). Any family, young or old, carrying too much debt is less likely to save enough for retirement. And once a family reaches that “decade before retirement” threshold with inadequate savings, it becomes extremely important to concentrate on debt reduction, particularly credit card debt. An effective way to do this is to get out those scissors. Cut up the cards. Or at the very least, pay off the balance(s) each month. In short, fine-tune that monthly budget (assuming you have one). Be ruthless in cutting back on needless purchases. For starters, quit dining out so much. Cut back on movies or those monthly subscriptions to all of that fine TV entertainment. How about slimming down the travel budget or eliminating those low-probability lottery tickets? And do you need the very latest in electronic gadgetry? In short, take another hard look at your Million Dollar Habits… the very habits that might have contributed to your unfortunate financial predicament in the first place.

Retirement Surprises

A common surprise is that, despite the government charts, many retirees underestimate their longevity – their time spent in retirement. And along with that underestimation comes a plethora of other surprises… often ordinary but very inconvenient costs. Just because you’re older doesn’t mean the AC won’t go out, a termite invasion won’t occur, the washer and/or dryer won’t quit, or the house won’t need a fresh coat of paint. Nor does it mean that an elderly parent or an adult child won’t need financial help. Or that a bright young grandchild won’t need some assistance in meeting tuition payments. Even for those who did a good job saving for retirement with IRAs and such, reaching age 70½ can have some unexpected negative consequences. I’m talking about those Required Minimum Distributions (RMDs) that must be withdrawn whether or not needed to buy groceries. Although RMDs are always nice sources of retirement income, they shove a surprising number of retirees into higher tax brackets (yeah, I know, you thought your tax rate would go down with age). And because of those myriad stealthy Obamacare taxes, RMDs too often translate into increased Medicare Part B premiums, which are tied to annual income... another serious bite out of those Social Security checks.

Remember, It’s Never too Late, But…

In summary, the point of trying to catch up after entering the fifth decade of your life can be a painful process, but it’s time to stop kidding yourself about your true financial situation. Lay your cards on the table as you consider the available options. They may or may not be realizable options. You may not be able to work due to health issues or the lack of available opportunities. You may not be able to gain much ground by downsizing. Maybe you’ve already slashed your debt and expenses to the bone. Point is, you need to do something and a good place to start is to develop (at last) a plan… a budget you actually follow… a practical approach to the last third of your life.

And remember, It’s Never Too Late, But Right Now Is Best.

"Excu-u-use Me" Series: The Fretful 40-Somethings
October 17, 2019

It seems reasonable to assume that most 40-somethings are individuals in their prime. Folks with 15-20 years of work and life’s experiences. Folks who’ve paid their dues and have incomes that reflect this experience and know-how. And hopefully, the college graduates among them have finally paid off those hefty student loans, freeing up disposable income for other purposes – including saving and investing, perhaps?

Oh, no! Here comes a new set of excuses. The mortgage payment is bigger because they bought a larger home in their late 30s or early 40s. And why? Well, an extra kid popped up and/or friends were buying larger homes. Must keep up with the Joneses…the Johnsons…the Jacksons. Also, those darn older kids need their own transportation – and the oldest one is heading off to college with the middle youngster already a junior in high school. And some of those Million Dollar Habits still lurk in the weeds.

Those Worrisome Bromides

Predictably, our 40-something seldom savers are far behind schedule in the median savings category with an estimated balance of barely $60,000 – not  even approaching the old rule-of-thumb bromide of needing to save at least three times one’s salary by age 40. Fidelity recommends that individuals have savings of three times their annual salary by age 40. So, if your salary is $55,000, you should have a balance of $165,000 already banked; at age 45, four times their annual salary; and six times that level by age 50. Read more in The Average Retirement Savings by Age | Investopedia. Whether a family is behind schedule or not (being a bit of a pessimist, I’m guessing they’re behind), it’s time to start maxing out those 401(k) or 403(b) contributions. And while they’re at it, open one of those Roth IRAs and max that sucker out, too.  To reach Fidelity’s benchmarks, consider putting salary increases toward retirement savings. And after paying off student loans, commit those payments to the retirement nest egg as well.

Did I hear you say, “Yeah, sure.” Well, just remember, you’re way behind schedule and the catch-up years are disappearing fast. In 2019, the maximum contribution to an IRA is $6,000. So, just do it! Get in a hurry. And quit smoking and impulse buying. You’re certainly not getting any younger and time is of the essence. Yes, you have good and valid reasons not to save – bigger mortgages, kids in or heading for college, and car payments stretching out beyond seven years, etc. But you also have good and valid reasons to save… and fewer years to do so.

Again...Do the Math

Using the same assumptions as in previous blogs (saver invests $440 per month at 6.45% compounded annually) except for the new start date of age 40, here are the numbers: the median savings of the 40-something group is $60,000 versus the early saver’s group of $212,500; at age 50, using the new numbers, the savings of the 40-something group is $185,600 versus the early saver’s group of $470,500; and at age 65, the savings of the 40-something group is $605,700 versus the early saver’s group of $1,333,200.

The value of starting to save early in a career and the associated value of compounding bigger numbers for longer periods of time really does make a startling difference in how financially comfortable you are in retirement. In this hypothetical case, over $727,000 worth of difference. Holy Molyl! If only…

"Excu-u-use Me" Series: The Harried 30-Somethings
October 10, 2019

By the time young people reach their 30s, they are more experienced and valuable to an employer who, most likely, will reward these more productive employees with salary increases. Or, if they are young entrepreneurs, they will reward themselves by being more adept at managing a business and increasing its profitability. Yet, most of these 30-somethings – if college graduates – will still have an outstanding student loan, a spouse, and a starter home (mortgage) purchased to make room for a couple of kids - more excuses to not save money. After all, mortgage payments, credit cards and other debt must be paid. And those pesky kids are now involved in all kinds of activities. And the car is coming of age, requiring frequent repair. These are all good reasons to spend money – and to not save anything – or at most, not save very much.

Behind The Eight Ball

By all accounts, it would be nice to save about three times one’s salary by age 40. But those stubborn government statistics indicate that most families have saved in the neighborhood of only $40,000 by this stage in life¹. Should we infer from this statistic that the family income is only $13,000? Of course not, but it most definitely is an indication that the 30-something family is “way behind the curve” in what it should be saving.

Remember the savings and investment strategy introduced in the 20-something blog (Oct. 4)? Let’s assume that another small percentage of families decide to become savers by ridding themselves of that insidious Million-Dollar Habit, smoking. Let's use the same assumptions as were used in last week’s blog, except that this group begins to routinely save at age 30 versus tucking away only a sporadic $20,000 like that 30-something group.

Penalty for Dawdling  

To recap those assumptions, beginning at age 30, the saver invests $440 of after-tax money every month in a Roth IRA, compounded monthly at 6.45%. Remember, at age 30, his/her savings account holds only $20,000; by age 40, it is worth $110,900 versus the early saver’s $212,482; by age 50, $280,761 versus the early saver’s $470,532, and by age 65, it is worth $848,600 versus the early saver’s $1,333,235 (for that 20-something kid who started saving at age 20).

Oh, the value of starting to save early in life and the benefits derived from compounding larger numbers earlier in the game! In short, by saving only occasionally during the first decade of a career, those excuses cost our sporadic saver over $484,635 in retirement savings (even though our sporadic saver began to steadily save after age 30).

Wait until you see what sporadic saving will cost those procrastinators in their 40s. That sad story is next (week).


¹Transamerica data shows 30-somethings have a median $45,000 saved. But to be headed for a comfortable retirement, ideally, the family should have about the equivalent of their annual salary saved as a nest egg at age 30, twice their salary at age 35 and three times their salary by age 40.

"Excu-u-use Me" Series: The Roaring 20-Somethings
October 4, 2019

In their 20s, just after high school or college, most unskilled or inexperienced workers don't knock down much dough. Many were raised by parents who made the same excuses for not saving that their kids are now making. Parents who, like their kids, went to college on borrowed money, had a good time, lingered on campus a couple of extra semesters longer than necessary, worked some - but not too much - during summer and semester breaks, and finally graduated burdened with a rather hefty student loan debt.

Hey, I’m not being critical here – just stating the facts – well, maybe I'm being a little critical. And I’m not speaking just of student loan debt. There’s also credit card debt, car notes, mortgage debt, and personal debt of one sort or another that must be dealt with. As an aside and speaking of debt reduction, eliminate the costliest debt first – usually credit card debt carrying interest rates of up to an astounding 20%. But best of all, avoid debt whenever possible.

Reasons NOT to Save

Unfortunately, because credit is plentiful, it’s easy to load up on debt in today’s world. For this and other reasons, most 20-somethings save very little by age 30. Many don’t save one thin dime. A common reason is that many 20-somethings believe that learning about personal finance is too difficult – with scant validity – largely a myth we hope to dispel with this blog. Give credit to a spidery financial industry (the Wazoos) working hard to spin the web that dealing with personal finances is SOOO COMPLEX. Well, it doesn’t have to be. Not if we keep a suspicious eye on the  Wazoos. They’re experts at using fine print and acronyms to convince us. They develop elaborate schemes – not to enlighten us, but to convince us to let them manage our money (primarily to enrich themselves).

Where are our Teachers?

One of the big gaps in today’s learning process is that our educational systems no longer teach the rudiments of personal finance to youngsters. However, all is not lost. Twenty-somethings are still blessed with time, God willing. Lots of it. But when the time factor is mentioned, up bubbles the oft-used excuse, “I just don’t have any time to spend on budgeting or messing with my personal finances.” Hogwash! Most younger people do lead busy lives – mostly watching television² on average 19-25% of their waking hours, not to mention time spent shopping or pursuing hobbies. Okay, so we have 40 years-plus to make up for lost time but remember… time is fleeting. And the decade you can least afford to lose is the one right out of school.

Free Money Opportunities

Many folks work for employers that offer a “matching contribution” (FREE MONEY) in their 401(k), 403(b) and other savings plans. And these same folks can even set up their own IRAs – Traditional or Roth. We’ll define the various savings plans in greater detail as we go along. Question is, will new hires take advantage of any of them now instead of later? The statistics say not likely, at least not nearly to the extent they should. One good move by employers in recent years is to automatically enroll new hires in defined contribution savings plans. Experience shows that once enrolled, few drop out… a good thing. And that participation rates nearly double to 93% under automatic enrollment compared with 47% under voluntary enrollment.

About Those Missed Opportunities

This brings up that most troublesome of habits – deferring financial opportunities until tomorrow, always tomorrow. Remember that “It’s Never Too Late, but Early is Better”. It seems so obvious that the longer we wait to save… to invest… to pay down debt...the more we miss those fleeting opportunities for investment gains. And the most egregious missed opportunity of all is to NOT participate in an available 401(k) or 403(b) - to fail to take full advantage of the EMPLOYER’S MATCH – that free money mentioned above. Just remember, time slips away, and suddenly you’re – gasp – 30!!!

So, c’mon, don’t worry about personal finances later. Worry about them right now and do something about it. Remember, these bad habits – putting  off saving, investing and paying down debt until later – affect us the most right now. The longer we wait, the more we miss out on potential investment gains and the glories of compounding.

The Marlboro Man

To place all this palaver in context, let’s create a simple example of an investment strategy ignored by most of the 20-something crowd. In our example, we’ll assume that the average 20-something – college educated or not – starts making enough “earned income” (remember that term) at age 20 to save a few bucks if he/she chooses to do so. Further, let’s assume this potential saver gives up smoking two packs a day of cigarettes (the most egregious of the many Million-Dollar Habits). Twenty cancer sticks cost about $7.26/pack (average price of a pack of those “cowboy killing” Marlboro Reds). Our ex-smoker now has $14.52/day, including Sundays, or roughly $440/month to invest. Based on some unusually sound advice from a friend, the new saver decides to invest this windfall in a Vanguard Total Stock Market Index Fund that, since inception, has yielded roughly 6.45% per annum (no guarantees, the past is not prologue). Our new saver now routinely deposits the $440 into a Roth IRA and invests it in the Index fund. After investing $440 of after-tax money each month in a Roth, compounded annually at 6.45%, by age 30, his IRA is worth $74,365; by age 40, $212,482; by age 50, 470,532; and by age 65, $1,333,235! Yes, you noticed. I’m being terribly optimistic, but I’m trying to make a point.

Compare these numbers to those mentioned in a Government Accountability Office (GAO) study, which noted that median retirement savings for most Americans, in the decade after retirement (age 65-75), totals about $150,000, a far cry from the $1.3 million figure mentioned above. That pathetic figure belongs to those former 20-somethings who decided to keep smoking or who simply chose not to start saving during their 20s. The $150,000 could have been $1.3 million-plus. Coulda! Woulda! Shoulda! Who knows, maybe in their 30s, this smoke-saturated group finally joins the savers, but even so, this Johnny-come-lately attitude has already proved to be a costly mistake in terms of future investment earnings.

Boring Student Loan Debt Fact

Almost 45 million Americans have student loan debt. We owe over $1.56 trillion ($521 billion more than the total U.S. credit card debt).

The average loan debt for the Class of 2018 graduates is $29,800¹ (69% of that class took out student loans). The average monthly student loan payment is $393. The student loan delinquency rate is 11.5% (90+ days delinquent or in default).

Chilling statistics.

Source: U.S. Federal Reserve

What’s The Point?

The point of all this blather is that we must first become savers in order to make money as investors. And by the way, index fund investing is not gambling. More correctly defined, it is “calculated risk-taking” by investors who employ dollar-cost-averaging in a highly diversified portfolio and dare to be average.

In short, young investors need to develop a good investment strategy and stick with it over the long term – a strategy that offsets our gambling proclivities; that avoids our tendency to roll the dice on a single “sure winner”; that defies our desire to play the Powerball lottery (with those wonderful odds of multiple millions to one), and so on. And just remember that a stock market chart looks like a sawtooth in the short-term – up and down, up and down – but smooths out over the long haul in a decidedly upward direction.

In next week’s blog, we’ll discuss the consequences of the 20-something’s “lost decade” error in judgment.


¹These student debt statistics will negatively impact the ability of several generations of savers to do just that… SAVE!

² The average millennial watches television 26 hours a week (3.7 hours a day) and older Americans (35-44) watch it 36 hours a week (5.14 hours a week).

The Scary Facts of Retirement Saving
September 26, 2019

SCARY FACT: The median retirement savings for most Americans in the decade preceding retirement (age 55-64) wallows in the neighborhood of $100,000, according to the Government Accountability Office (GAO). Despite all of those zeroes, it’s a frighteningly inadequate number, if accurate – a dollar figure that will exhaust quickly in retirement. Particularly if you live a couple or so decades after retiring… as many people do.

The same GAO study revealed that during the 10 years after retirement (age 65-74), the amount on hand was around $150,000. In short, even accounting for inflation-adjusting Social Security checks, most Americans enter the Golden Years with woefully meager nest eggs. Holy Moly! Captain Marvel, how do all of these Baby Boomers and Generation-X folks plan to survive 15-25 years of those relentless day-to-day expenses in addition to mounting healthcare costs?

These startling GAO numbers are supported by some median net worth numbers cited in a Business Insider article by Jim Wang. Of course, retirement savings and median net worth numbers differ in that retirement savings is a component of net worth. Point is, the Business Insider article’s numbers support the accuracy of the GAO numbers (i.e., in the 55-64 age group, Wang’s median net worth figure is $144,000 compared to GAO’s retirement savings number of $100,000. In the 65-69 age group, Wang’s median net worth is $194,000 and GAO’s retirement savings number is $150,000). I cite these statistics to focus your attention on how so very few folks properly prepare for retirement in today’s America.

Too Late? Maybe.

It seems to be a bit late in the game for the older generations to take much corrective action, but what about those in the under age 35 category – the Millennials? No good news here. They hold less than $7,000 of median net worth… wow!  And I suspect very little of that $7,000 is truly investable savings. More probably, it’s equity in a home. And what’s my point, you ask? Well, let’s revive one of my favorite old dictums: It’s Never Too Late but Early is Best!

Using my usual financial data to make the point, what would happen to these same age categories, had they, at age 20, established a Roth IRA, saved a paltry $100/month, and invested in an Index fund earning 7% compounded quarterly? How would their net worth have been impacted over time?

It appears that in America’s near future, Social Security, a good but terribly underfunded program (refer to A Tottering Stool blog July 26, 2019 in the Archives section), will provide most of the income for half of the people over 65. You’ve probably heard the rumors about little old ladies (and little old men) eating cat food to avoid occasional bouts of hunger. The foregoing statistics tell you why that possibility just might exit. By the way, until her untimely recent demise, my cat enjoyed her food, so, maybe it won’t be so bad.

Crisis Avoidance

Despite my witticisms, the foregoing facts are alarming. But they can be avoided. How, you might ask? Simple. Start saving early in life. Certainly, before your mid-40s. If possible, in your early 20s. To which you reply, "But, young people don’t have any money." To which I reply, "Balderdash!"

Like so many of their elders, a preponderance of young folks lack the discipline required to save. And many of them develop those million-dollar habits I mention from time to time, most of which are money-chomping habits. And, too, young people have a litany of excuses not to save, some perfectly understandable and others – well – just handy excuses.

In the next few blogs I will reveal the various generational excuses people use not to save. Remember, these are the same excuses, real or imagined, that wage a holy war on The Amazing Power of Compounding by gutting the act of saving (money) of its most important component, time!  We’ll begin next week with the 20-somethings.

The “Q” in PDQ Principles
September 19, 2019

Quality is often in the eyes of the beholder. Webster’s dictionary has a whole slew of definitions for quality, most of which simply cloud the issue. I like a simple little Internet definition: The standard of something as measured against other things of a similar kind. When it comes time for selecting an investment vehicle, help is so plentiful as to be confusing. When seeking information about a mutual fund – managed or Index – I always like to know what Morningstar (they specialize in mutual fund investing) thinks of a given fund. But my favorite information source is Vanguard’s trove of their own funds’ histories and investment guidance (yeah, I’m biased), particularly the “pitfalls that investors should avoid.”

Here’s a quick summary of those pitfalls:

Performance Chasing

Being human, we’re all vulnerable to the lure of past performance (stocks, funds, racehorses, whatever). And though many of us have learned important lessons in doing so, it’s an oft repeated mistake. Generally speaking, investing based “strictly” on past performance is a quick ticket to mediocre results or failure. Keep in mind that superior past performance might be based on excessive risk-taking, luck, or other factors having nothing to do with quality. Of course, superior performance can also be based on good management, but be cautious, managers come, and managers go.

Paying Too Much

A mutual fund investment is accompanied with management fees – a lot in some cases, very little in others (index funds fall in the latter category). Vanguard research has found that less expensive funds, even actively managed funds, have a better chance of beating their benchmarks than more expensive funds. The reason is obvious. Lower fees simply allow investors to keep a greater portion of the fund’s return. Pay for good performance, but don’t pay too much!  You don’t have to. Do your homework. The information is out there, much of it free for the taking.

Adopt Reasonable Expectations

If you’re like me, you don’t like losses. The simple fact is, no matter how good fund managers are, they will underperform the market from time to time (usually quite often). Vanguard reported that of the 2,202 “active” equity funds that existed in 2001, only 476 outperformed the market. And 98% of that 476 group underperformed the market in at least 4 out of the 15 years ending December 31, 2015¹. This Vanguard-provided history is a bit dated, but it reinforces several of my PDQ Principles of Investing. And more recent studies support the data. Be patient. Don’t abandon a fund during a downturn or setback. Have reasonable expectations about the fund’s performance, whether managed or unmanaged. Diversify. And give index funds a hard look versus managed funds. In short, dare to be average.

Index Funds Now Rule The Roost

If you decide to invest in a broad market index fund, you’ve bought quality.  According to S&P Global, more than 80% of U.S. actively managed equity funds underperformed the S&P Composite 1500 in the decade ended 2018 – or no longer exist. Small wonder that droves of investors have abandoned active funds in favor of passive index funds, and the trend continues. In fact, today’s Wall Street Journal carried this news. “Funds that track broad U.S. equity indexes hit $4.27 trillion in assets as of August 31, 2019. Funds that try to beat the market had $4.25 trillion as of the same date.” This is a major investment event and another recognition that it’s hard to beat the market.

So, Why Not Dare to be Average?

As I summarized in my book, The Generation-X Files (Dare to be Average), even if you decide not to go the index fund route, any investment technique worth its salt should do several things, including: provide a competitive rate of return over time relative to other available investment opportunities; offer reasonable diversification among stock, bonds and cash; be tax-friendly when not under the umbrella of a tax-deferred retirement plan; have a low maintenance cost (whether it be an annual expense ratio or an advisory fee); and require minimal oversight (to avoid those sleepless nights). Index funds offer these characteristics, but who am I to judge what’s best for you? Check it out for yourself!


¹Data are as of December 31, 2015. Vanguard’s analysis was based on expenses and fund returns for active equity funds available to U.S. investors at the start of the period.

The “D” in PDQ Principles
September 12, 2019

You’ve heard me say this before, but I’ll say it again. For small investors simplicity is the key to successful investing. Building a complicated investment portfolio can lead to confusion, greater expense, a lot more fretting (worry), and not infrequently, it can cause us to second-guess the choices we make.

Dwell on this contention for a moment: The most important aspect of wise investing, in my opinion, is BEHAVIORIAL, NOT FINANCIAL. I’m talking about the ability to save and invest on a continuous basis while ignoring perfectly normal human compulsions – compulsions to “bail out” in a down market fearing a loss – temporary though it might be – or to change those consistent buying patterns fearful of missing out on the “next big opportunity”.  

Remember this, folks. The decision trigger is hard to pull when a market is surging – up or down. So, to avoid these compulsive behavioral issues, I suggest implementing a consistent buying pattern of… hopefully… quality investments and stay put. Yeah, I know, staying put in a “big ole pullback” is very difficult, but a great deal of money is lost when folks flush like a spooky covey of quail early in a major downturn, and not necessarily because they are saddled with a poor investments.

Diversity = Index Fund

Speaking of positions, let’s talk about my old friends, the index funds. I know, I know, you’ve heard me talk about them, ad nauseam, but a brief retelling of some reasons for investing in index funds is on my mind today. Remember diversification, the “D” of the PDQ Principles of investing? The S&P 500 Index Fund¹ is a very low-cost way to gain broad exposure to the domestic equities market. The S&P 500 Fund creates ownership in 500 of the largest U.S. companies spanning many industries that, collectively, account for more than 75% of the U.S. stock market’s value. An associated risk, of course, is exposure to an occasionally volatile stock market. Just remember that old saying, “stocks fluctuate”. Since the S&P 500 Index Fund (or if you prefer, a Total Stock Market Fund) is so broadly diversified, I consider it “the” core equity holding for my own piddling little pile of quarters.

Minimize Pesky Fees

Recent history has proven that low-cost index funds result in superior long-term yields for small investors versus a scattergun approach – superior even to yields attained by other perhaps more experienced investors. And I’m including the big boys: pension funds, institutions, and many affluent folks who seek the help of pricey financial Wazoos. You just can’t beat the price. Index fund fees are as inexpensive as it gets. For example, combined, a 90% mix of stocks and 10% short-term bonds purchased through Vanguard would result in annual operating fees in the neighborhood of  0.055% of the account balance, amounting to $55 per year per $100,000 of investment, if you invest in the least expensive variant of the funds.

By contrast, the average “Wazoo-managed” fund is 20 times more expensive than the previously mentioned two-fund solution touted by none other than that penniless old vagrant from Omaha, Warren Buffet (i.e., he deals in billions, not pennies). I personally invested 10% of my stray dimes in short-term government bonds and 90% in a very low-cost Standard & Poor’s 500 Index fund years ago to establish my core investment portfolio.

Passive is Lucrative

The S&P 500 Index Fund seeks to replicate the performance of the benchmark index by investing in the S&P 500 companies with similar weights. This fund employs a passive investment strategy and invests all or a substantial amount of its total net assets in common stocks included in the benchmark index. Still not buying this business about index funds? Studies show that two-thirds or more of active managers underperform the S&P 500 Index.  Studies also reveal that during the most recent 15-year period, more than 90% of active managers underperformed their benchmark indexes. The picture that emerged from one such 15-year study was attention-grabbing, to say the least: 92.2% of large-cap funds lagged a simple S&P 500 index fund. The percentages of mid-cap and small-cap funds lagging their benchmarks were even higher: 95.4% and 93.2%, respectively.

In short, the odds that a managed fund will beat the yield of an index fund are only about 1 in 20. And in a given year, you never know who that 1 of 20 managers is going to be. Keep in mind, too, that passive index funds are more efficient than managed funds. Most managed funds trade stocks frequently; thus, they tend to not necessarily earn more while realizing more taxable gains each year. Passive managers simply add or subtract companies in their funds less often, creating fewer capital gains tax liabilities.

In summary, passive index funds are not burdened with researchers and stock pickers, which results in low annual expense ratios (fees). And since they follow a market measuring index they are very transparent. And equally important, buying index funds is a simple approach for new investors, and boy do I love simplicity. For a slam dunk primer on the pros…  and cons… of index fund investing, I recommend reading this carefully researched article by Motley Fool contributor Jason Hall. It may be more than you ever wanted to know about index funds but take a peek anyway. It’s very enlightening.

Remember old Ben Franklin’s sage advice: "An investment in knowledge pays the best interest."


¹The S&P 500 Index consists of 500 of the largest U.S. companies listed on the New York Stock Exchange or NASDAQ, selected by the Standard & Poor's Index Committee based on market capitalization. It is a widely recognized barometer of the U.S. equity market. An S&P 500 Index fund seeks to provide investment results that correspond to the price and yield performance of the S&P 500 Index, its benchmark index. To achieve this objective, an indexing strategy invests nearly all its assets in stocks with approximately the same proportions as the weightings.

The “P” in PDQ Principles
September 5, 2019

“Don’t just do something, stand there!”

This is probably one of the least followed pieces of advice out there, particularly among new investors. Think about these statistics. Back in the 1930s, the average holding period of a NYSE-traded stock was 10 years. By 2010 (according to NYSE data), the average holding period had dropped to 6 months. The reasons are many – advanced computer technology and social media among them – but plain old human impatience is probably the biggest factor.

As mentioned in last week’s blog, we’re going to take a deeper dive into each of the three components that make up my personal investing approach – what I refer to as the PDQ Principles: patience, diversification, and quality. Because I’m not big on dawdling, let’s get right to it. The “P” in my PDQ Principles stands for Patience, which I’m told, is a virtue.

Why We Do What We Do

An overbought market (a possible scenario since the Great Recession) or a market that becomes suddenly volatile can be unsettling for investors. What is an overbought market? When folks are optimistic about the future – maybe the economy is on the upswing or there is an expected tax code revision in the works – they tend to take more risks. During such times, we see lots of buying, buying, buying in the market, and this can cause us to forget that stocks fluctuate. Overbought markets make me think of my old amusement park experiences, where the excitement level peaked just as the roller coaster seemed to be reaching its highest point. In short, what goes up… well, you know the rest. But generally speaking, if you own quality products, recovery is imminent.

Many folks grow impatient during such times and decide that the market has exceeded their comfort level; thus, they move from a “buy and hold” mentality to “buy and sell”.

If you’ve read my earlier posts, you know where I stand on the subject. And judging by the fact that my first PDQ principle is “patience”, it isn’t hard to guess that I’m partial to the “buy and hold” strategy.  There are many reasons for it, but one biggie is that the anxious investor – particularly one who is quick to sell or make trades – often gets dinged by capital gain taxes.

As you know, when you sell an investment, you either have a gain, a loss or you break even. If you sell for a gain, you’re most likely going to be paying a percentage of that gain to Uncle Grabby, as I like to call old Sam. And often, the resulting tax bill is greater than the perceived protection (reduced risk) that bailing out might offer.

To Sell or Not to Sell, That is the Question

The truth is, we don’t live in a world of absolutes, and there are moments in our lives when necessity trumps best practices. If ready cash (that rainy day fund) isn’t available, selling stock to send a kid to college, or repairing or replacing an aging vehicle, or even providing the basics like food and shelter is just what we have to do. And it’s completely understandable.

On the flip side, I’ve seen many investors (including myself, in my younger, less patient days) hop on the “buy and sell” train for reasons that are much less justifiable, like:

• I have to sell (when you really don’t).

• I want to sell (in which case you’ll find a reason).

• I really want to sell (meaning you are scared to death and any abrupt down-market will cause you to flare like an old Canadian goose, dodging shotgun pellets above a southern Arkansas rice field).

• Or worst of all, I simply must do something (an oft-used excuse to join a thundering herd of wild-eyed, Wazoo-influenced investors heading for the exit).

Outside of pressing financial matters, much of the reasoning investors provide to justify outright selling is purely psychological. The truth is, unless you are confronted with an inescapable financial need, patience is your best friend – whether you’re dealing with a temporary market downturn, the more contemporary terrorist attack, or waiting for a golden buying opportunity to present itself.

Don’t Learn From Your Mistakes, Learn From Mine

If you think you MUST seek professional financial advice, do so based on your needs, your goals and your own time horizon, not on another person’s market forecast. Speaking from my own experience – listening to others or trying it myself – it’s next to impossible to predict the peaks and valleys of the stock market. Odds are, the Wazoos won’t be any better at predicting major market moves than you.

So, take it from a fellow that’s been around the block a time or two…some say three… unless you have no choice, at least consider the “buy and hold” approach. If you’ve done your research and purchased quality products in a diversified manner, patience is your best friend. Sit back and relax. Based on the historically upward trend of long-term markets, you’ll end up where you want to be.

And remember, too, those highly-diversified index funds can be solid investment options with a track record to prove it. We’ll talk about diversification in next week’s blog. Until then, don’t just do something, stand there!

“Even the intelligent investor is likely to need considerable will power to keep from following the crowd."

--- Benjamin Graham.

People of Importance.
August 29, 2019

You’ve heard the term Time is Money. Well, in a very real sense, it is. The most valuable thing you have in life is your precious time – and it’s finite. It’s up to you how valuable it becomes. The young fellow that co-founded and currently leads Facebook, Mark Zuckerberg, certainly added value to his time early in life. You see examples of friends and neighbors enhancing its utility every day. Time is not meant to be wasted but so often we do just that. Because wasting time comes naturally.

First, let’s create a proper environment - at least initially - an achievable world in which to develop the simple plan we intend to pursue. Let me be more specific. My objective for you – the Millennials, Gen-Zers, and that budding Alpha Generation – is to plant in your minds the importance of time as it relates to money. Because, if not yet obvious to the youngest two generations, money will become integral to most of your major decisions in life. This involves two other vital concepts already mentioned in previous blogs:  It’s Never too Late, but Early Is Best and The Amazing Power of Compounding. Like the PDQ Principles of Investing, these concepts feed on one another.     

Never Stop Earning

My ultimate objective for this blog is to create situations where even while wasting time, our adopted plan is adding value despite our wasteful propensities. A successful Millennial recently told me that before she became the master of her own destiny (FIRE), she worked 50-60-70 hours a week for pay – often good pay – but earned little more. She still works a lot, doing what she enjoys, but now earns money while she works AND while she sleeps or pursues other interests. This is the world many of us hope to achieve – where we, too, become masters of our own destiny. It necessarily involves the productive use of time and money. It can include adolescent years (it did in my case thanks to my parents), teenage years, young adulthood, and later, those middle years when folks finally begin to consider the possibility of “an end in sight”.

Simplicity and the PDQ Principles

My plan is simple, but as mentioned earlier, simple things are often very difficult to achieve. In its simplest form, and as early in life as possible, we begin to swap our precious time (labor, brain power, etc.) for money. The point is to save as much as circumstances permit, invest those savings in a disciplined, diversified manner, and then patiently go about our business as our future becomes increasingly secure.

So, let’s continue this journey down a more enlightened path, which means it’s time to elaborate on my PDQ Principles of investing: Patience, Diversification and Quality implemented under the guiding light of  a simple financial plan – one that begins TODAY (It’s never too late, but early is best) and that optimizes the amazing power of compounding. Remember, a single dollar invested today at 10%, compounded quarterly, for 45 years will produce $85 at retirement; whereas, the same dollar invested 20 years later at 10%, compounded quarterly, for 25 years will produce only $12 at retirement. This illustrates the startling difference between beginning to save at age 20 versus two decades later. And for all kinds of reasons, that’s what far too many people do… wait until their 40s to start seriously investing for their future retirement.

We’ll begin next week with the “P” portion of the PDQ Principles – that is, if you can muster the “patience” to wait until next week. If not, you can sneak a peak at You, Me & the Tree where I introduced the principles back in 2018.

Recession-Proofing Your “Stuff”
August 23, 2019

We’re hearing a lot of chatter these days about a looming recession¹. They do happen, and you will experience one or two… or more… along the way. So what the deuce is a recession, you ask? Well, it can mean different things to different people, but common traits are a decline in consumer confidence (experience-based or rumor-based) due perhaps to job loss and reduced or stagnant wages that encourages folks to change their shopping habits. When those things occur, the natural result is moderated shopping and a decline in business investment activity. In short, the economy shrinks, and the Gross National Product (GNP), the broad measure of a country’s economy, goes negative. There’s no approximate period for how long recessions lasts, but they often linger for more than 6 months². The early 1990s recession lasted 8 months causing a GNP deterioration of 1.4%. Ten years later, the early 2000s slump lasted 8 months resulting in a GNP decline of 0.3%. Six years later, the mortgage crisis-inspired Great Recession reared its ugly head, driving the GNP down 5.1%. That recession ended 10 years ago.

So, if you feel a recession coming on, what do you do? I’m guessing you already have a plan, but if not, make one and stick with it. Here are some tips based on my own experience.

Protect Your Assets

    So how do we protect our assets from these dastardly recessions? In response to this question, I’m inclined to bring up my PDQ Principles of investing –Patience, Diversification and Quality. Hopefully, as an investor, you already practice some or all three of these principles as part of your plan. But allow me to elaborate beginning with patience. Patience is such an important personal trait to exercise during a recession. It manifests itself in several ways. Stay calm. Follow your plan. Don’t let surging emotions take over, which often lead to irrational and impulsive decisions. Just remember, if you’ve made quality investment choices, once the economy begins to recover – and it always does – those wise, diversified investments you made prior to  the recession will also recover.

    But what if I need my money very soon, you mutter? I would answer, do you need it all right now? If not, don’t be impulsive and sell everything if you need only some smaller portion of your investment dollars. Just remember, in a declining market your fear of loss is stronger than usual, and impulsive decisions can lead to a much greater financial setback than the situation might warrant.


     As to that diversification principle, particularly in an economic downturn, it helps limit losses and often creates opportunities for a quicker recovery. I’m inclined to favor broad market index funds for young investors. But as an individual matures and is financially able to afford a broader scope of investing, a diversified portfolio might also include – in addition to stock funds – bonds, real estate (usually a young investor’s home), even some small-scale exposure to other real estate and… mmm… commodities. And, of course, whether young or old, six months to a year or more of rainy day funds (cash) will come in very handy – possibly enabling you to avoid selling any of your investments to meet unexpected short-term needs and/or emergencies. If you’re not inclined to go the fund route to achieve diversification, at least try to identify investment-grade bonds and/or companies with quality assets, little debt, and good cash flow. And in that same vein, look inward because the same rules apply to your own household. Your chances of outlasting a recession are much more likely if you have that rainy day fund, a small debt load, and steady employment (cash flow) to cover those dastardly bills that keep on coming.

Keep it Quality

   Trust your judgment. If you’ve saved that important rainy day fund (cash or near-cash), and if you stick with your quality investments, you can ride the usual recession back to prosperity. And please keep in mind, bailing out of your investments in the face of a downturn can lock in untimely gains, triggering taxes, or real losses – or both. If you trust that “quality” portfolio, and if you exercise patience, those “paper losses” are most likely to be temporary in nature. And ask yourself this question. If I do decide to sell, when do I buy back in? During the inevitable recovery, most of the folks who do get back in, often do so late in the recovery cycle, suffering what I call “opportunity losses” as well as those real ones incurred by selling during the downturn. Timing your way in and out of a market is a losing game. Don’t fall victim to it unless uncontrollable circumstances force the issue.

Don’t Sell, Buy

    If you feel a recession coming on, consider making small, frequent automatic investments – perhaps in your 401(k) or 403(b) retirement plan at work. And keep doing it throughout the recession and beyond. It’s called dollar-cost averaging, a system that buys you more shares when prices are lower. And keep reinvesting any surplus earnings (like dividends) for the same reason… lower share prices. Remember, if you’re either anticipating or experiencing a recession, don’t join the thundering herd and become a seller. Recessions create buying opportunities. Don’t miss out by selling out.

¹Recession: A period of general economic decline defined as a contraction in the Gross Domestic Product (GNP)  for a period of six months (two consecutive quarters) or longer. Much milder than a depression, a recession often doesn’t last too far beyond a year and is marked by high unemployment, stagnant wages, and a decline in manufacturing, retail sales and the aforementioned GNP, a measurement of economic output.

²The average duration of the 11 recessions between 1945 and 2001 was 10 months, compared to 18 months for recessions between 1919 and 1945, a period that included the Great Depression (NBER Business Cycle Expansions and Contractions).

Grandparents Are Special
August 16, 2019

While anticipating the pending stampede by high schoolers to institutions of higher learning this fall, let’s dwell a bit on how to help youngsters earn a degree without accumulating huge debt that could burden their future for decades. This is increasingly important because, based on my studies, a college degree doesn’t represent the value it once did. And why not? According to the Labor Department, salaries for college graduates have remained essentially flat since the turn of the century (adjusted for inflation). And the price of that degree has soared relative to other cost of living items (a reduced bang for your buck, thanks to Professor Izzy the Inflation Monster). Also, those earning degrees seem not to be accumulating wealth on par with previous generations. The media often proclaims that today’s young adults are less well-off than their parents and grandparents were at various important signposts along life’s journey.

    I’m not suggesting that a college degree doesn’t improve one’s opportunity for a bigger paycheck than, say, a nongraduate. On average, it most certainly does. What I am suggesting, however, is that the yield on “earning a degree” is not what it used to be. If true, that should spur folks to look for ways to reduce the cost of an education investment – directly and/or indirectly. A couple of years in a local junior college might be in order. Being a good student and graduating in four years would also help. And a student might even consider working part-time while in school (review Reagan’s Journey Begins in the Wynn$ights "Past Posts"). Or indirectly, some financial assistance from Gramps and Grams could reduce the long-term burden of student debt.

    Last week, we talked about Hypothetical Henry and how his parents were preparing for those expensive college years. This week, let’s explore a few more details of a 529 Plan – and another alternative, the Direct Pre-Payment of tuition to an educational institution. According to AARP, in addition sharing wisdom and experience, grandparents spend in the neighborhood of…gasp… $179 billion annually on their grandkids. The figure includes money spent for higher education as well as on other life expenses… even groceries and vacations. No wonder Gramps and Grams are so special.

The 529 Plan

     Let’s focus for a moment on how many grandparents do help alleviate some of the financial burden. There’s a world of information on the internet about 529 Plans and Direct Payment of tuition, but some unique factors require discussion when grandparents get involved. For instance, might grandparent assistance jeopardize the grandchild’s need-based financial aid, and how well does it mesh with the grandparents’ own financial planning? And being conservative sorts, grandparents often don’t want to give money directly to their grandchildren. Or perhaps they don’t want to cede control of the funds to others until the funds are actually disbursed. As mentioned, a downside to grandparents owning the plan (particularly in families seeking need-based aid), the distributions from elders count as student income on the Free Application for Federal Student Aid (fafsa); a designation that  weighs much more heavily than parental income in the aid formula.

    Still, many grandparents – me included – would rather make contributions annually to a parent-controlled 529 Plan. By ceding, they lose control of the money but gain the benefit of not having to worry about maintaining the account. Some states allow grandparents to own the plan and then cede its ownership to the parents just before the student heads for college. This practice allows grandparents to mostly have their cake and eat it too.

A Quick Review

    In case you missed what was footnoted in the previous blog (Hypothetical Henry), 529 Plans are operated by state or educational institutions with certain tax and other advantages to ease the burden of saving for college and other post-secondary training. Likewise, they can be used to pay for tuition at elementary or secondary public, private, or religious schools for the designated beneficiary. Earnings are not subject to federal tax and typically not subject to state tax when used for qualified education expenses such as tuition, fees, books, as well as room and board at eligible education institutions and tuition at elementary or secondary schools. Although contributions to 529 Plans are not deductible for tax purposes, they offer tax-deferred growth and tax-free withdrawals. You won't pay any income taxes on the amount your account earns while it's growing, and if you use the money for qualified education expenses, those earnings will be tax-free when you withdraw them.

    Grandparents, if still married, can contribute as much as $30,000 a year to a 529 Plan (per grandchild) without triggering gift-tax consequences. And if they’re into downsizing their estate, or simply feeling extra generous, they can do a “bunch” – contribute five years of annual gifts into the plan in one year without triggering a taxable event. This is often done when establishing the plan to enjoy five-fold, the Amazing Power of Compounding.

    We’ll discuss 529 Plan investing in a future blog, but for a quick preview, check out the Vanguard 529 Plan age-based options (conservative, moderate, aggressive) for some ideas. A quick peek will open your eyes to all kinds of investment options.

Direct Payment of Tuition

    Grandparents can also write checks directly to a school without triggering Uncle Grabby’s gift-tax rules. In short, they can prepay tuition directly to a university and at the same time, give the grandkid an additional tax-free gift (currently $15,000 per year per grandparent). Unfortunately, this gift tax exemption only applies to tuition expenses and not to those myriad other expenses (countless fees, room and board, books, supplies, etc.).

    A word of caution, this prepayment of tuition is typically NOT REFUNDABLE should your grandchild decide to change schools. So, don’t get overly zealous and ante up for all four years. And, yes, this type of grandparent assistance can negatively impact the student’s eligibility for needs-based financial assistance, too. By the way, Gramps, the money you prepay to an institution for a grandchild’s tuition is not a charitable deduction, so don’t get any funny ideas along those lines. Uncle Grabby can be a rough customer to deal with when tested.

    There are many other ways to help a kid go to college, but I lean toward the 529 Plan. Still, whatever choice you make, the key is getting started. You’ve heard it before and you’ll hear it again: It’s Never Too late, But Early is Best.

Hypothetical Henry
August 9, 2019

As I often preach, wealth is created by saving and investing over long periods of time. For a youngster to get the biggest bang for the buck – and because most of them have little or no disposable cash – parents and/or grandparents can build wealth for their kid or grandkid by investing money at the youngster’s birth or early in his/her life.

Hypothetical Henry’s situation offers an example of planning ahead.  

Henry/Summer 2019

    You’ve heard the numbers, $1.5 trillion of mounting debt and counting. And the stories that Millennials are so bogged down in student loan debt that many of them postpone marriage, home buying, family creation, etc.  Henry is a Gen-Zer and thank goodness for that – unless he follows in the footsteps of so many of those Millennials and older Gen-Zers. There’s a glimmer of hope for Henry. He’s only 13. He still has five years to plan for college if he chooses to go. Wait a minute… 13 years old… isn’t it a little late in the game to start making plans to finance a college education? I agree, it is a bit late, but I firmly believe in the saying: It’s Never Too Late, But Early is Best!  

    Henry’s case is a hypothetical situation presented to demonstrate what can happen if planning for the college “financial” experience is addressed early on. And because it is hypothetical, let’s begin with the usual theory that Henry was very careful in choosing his parents.

    For starters, Henry’s parents opened a 529 Qualified Tuition Program¹ shortly after his birth. They immediately started depositing $2,000 per year in the plan, invested every penny in an unmanaged Total Stock Market Index Fund…and as [bad] luck would have it, during the plan’s third year, the Great Recession reared its ugly head (every story needs a bit of drama). The plan’s excellent first year return,15.63%, looked fantastic when compared to year two, 5.57%, then – ouch! – here came year three…the Great Recession… a (negative) -36.99%. But Henry’s parents were true believers in index fund investing for the long haul. They stood strong, and the next two years rewarded them with double digit returns of  28.83% and 17.26%, respectively. Henry’s 529 Plan was back in business. And over the next eight years, it enjoyed five years of double digit returns, two years of – argh! – less than 1%, and only one more of those negative years, down 5.17% in 2018.

    To summarize, Hypothetical Henry’s 529 Plan experienced on the front-end, the Great Recession, and has since enjoyed several years of an extended bull market – a mixture of more good times than bad. He also enjoyed a mom and dad who faithfully employed the PDQ Principles of investing: Patience… Diversification… Quality. Reminds me of that conservative old gentleman, Benjamin Graham, who said, “The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a simple financial plan and are exercising a behavioral discipline that is likely to get you where you want to go.” We’ll discuss those PDQ Principles of investing at length in future blogs.

    Before we get back to Henry, though, if a parental plan is to minimize college debt, a big first step might be to have a college-bound youngster attend, if circumstances permit, a local junior college to enjoy cheaper tuition and fees and “free” room and board – while taking core curriculum courses. But that’s another topic. The 529 Plan Henry’s parents created years ago, barring a market meltdown, will probably enable him to attend a large state institution away from home.

    Let’s review Henry’s situation with some facts. In doing so, let me introduce you to a wonderful program called the College Savings Planner that helps parents determine whether or not they are on course to meet financial goals. Developed by Vanguard, it’s user friendly and among other things, provides general information about the cost of attending various institutions around the country.

    In Henry’s case, after investing $2,000 per year for 13 years, earning approximately 9.25% per annum, his plan currently holds $52,265 despite the slow start. His parents plan to continue investing $2,000 per year but because the current bull market is getting long in the tooth, they decide to adopt a more conservative 6.2% annual yield outlook until Henry graduates – not the 9.25% they’ve enjoyed so far (despite the Great Recession).

    Based on the current plan balance and assuming an annual college expense of $28,400 (tuition, books, room & board, etc., plus a 5% inflation factor), they currently have about 2.5 years (60%) of Henry’s education covered.  To get to 100%, they would have to contribute an additional $5,800 per year, assuming a 6.2% annual yield. By the way, if their index fund continued to yield 9.25%, they would only have to contribute $3,500 per annum to reach 100% coverage. Vanguard also has good information on 529 plans.

    In summary, Hypothetical Henry is in good shape financially because his parents started planning for his college experience very early in his life. Consider the alternative of doing nothing or starting too late in the game to avoid those crushing student loans. Perhaps this information about 529 plans and the Vanguard planning tool will help you avoid membership in the $1.5 trillion student debt club. And remember my mantra about getting started: It’s Never Too late, But Early is Best.

¹529 Plans are operated by state or educational institution with certain tax and other advantages to ease the burden of saving for college and other post-secondary training. Likewise, they can be used to pay for  tuition at elementary or secondary public, private, or religious schools for the designated beneficiary. Earnings are not subject to federal tax and typically not subject to state tax when used for the qualified education expenses such as tuition, fees, books, as well as room and board at eligible education institutions and tuition at elementary or secondary schools. Note: Although contributions to 529 Plans are not deductible, they offer tax-deferred growth and tax-free withdrawals. You won't pay any income taxes on the amount your account earns while it's growing, and if you use the money for qualified education expenses, those earnings will be tax-free when you withdraw them.

Raegan’s Journey Begins
August 2, 2019

Today I introduce to you a promising member of my Gen Z audience. Raegan is a bright, shiny new penny with energy and intellect to burn and appears to be well on her way to a successful future.

     My mission with this blog is to show Raegan and her friends that if they consistently save and invest early in life, they can accumulate mind-boggling sums of money thanks to The Amazing Power of Compounding. It requires nothing more than a simple plan, a few bucks, and a truck-load of patience, but starting NOW is the key! And in my humble opinion, core equities for the average young investor are index funds. They offer quality, low-cost, highly diversified products that yield market rates of return – all the investor provides is a steady flow of savings and the patience to stay put while others run for the hills during volatile times.

     Raegan is 20 years old, a university junior pursuing a challenging double major. She also works to help fund her own education, and behold, SHE’S SAVING A FEW BUCKS A MONTH, TOO!  Raegan also carefully selected her parents (jesting) who provide encouragement and occasional financial support along the way. With parental assistance and by working 25 or so hours a week, Raegan just might graduate from college without that burdensome anvil called a student loan hanging around her neck, and maybe… just maybe… an IRA in her handbag of early financial accomplishments.

    Here’s some brief insight into her thinking. Because she works and has “earned income” (a must in order to contribute to a Roth IRA), she is carefully researching the possibility of opening a Roth, saving $100 per month while in college (including a couple of years in graduate school), and possibly investing some of her initial savings in a Vanguard Target Retirement 2060 Fund¹. This fund invests in Vanguard index funds beginning with an allocation of approximately 90% of assets in stock and 10%  in bonds.

    To buy into this very low-cost (currently .15% per annum), relatively high-risk fund (four on a scale of five), Raegan will initially have to accumulate the required minimum investment of $1,000. As to the risk factor, she’s young and the Target Retirement 2060 Fund will assure that she’s properly diversified with a collection of domestic and international stock and bond index funds. As to the potential reward, over its eight-year life, this fund has yielded just over 9%, but this yield might be a bit deceiving…its total history is bounded by the current 10-year bull market. For this reason, the cautious, conservative Raegan is assuming that her long-term investment yield will likely be a more moderate 6% or so. But who knows for certain.

    Raegan also understands that money saved and invested within the confines of a Roth, unlike a bank savings account, has certain limits on future access². For a terrific summary on IRAs, she might suggest that her fellow travelers check out The Motley Fool's Beginner's Guide to Understanding the Roth IRA (for beginners). For a review of IRAs in general go to Vanguard's Size up the basic IRA types.

    Ultimately, Raegan will make up her own mind about how much to save and how and where to invest, but more importantly, she has begun her personal “private investor” journey at a very young age. So, let’s take a look at a couple of hypotheticals she might very well experience along the way, starting with the seed money of $1,000 and a monthly Roth IRA savings plan.

    Let’s assume that Raegan saves the $1,000 minimum and invests it plus a $100 per month for the four remaining years of her college experience, and that she does, in fact, earn 6%, compounded quarterly, on her Target Retirement 2060 Fund. Upon graduation, four years hence, she checks her Roth IRA and finds an accumulated balance of $6,700. Thrilled with this result, she decides to stick with the $100 per month saving commitment for an additional 40 years (Note: Raegan will no doubt expand her portfolio to include many other retirement assets during those 40 years, but let’s concentrate for the moment on her Target Retirement 2060 Fund). What will the fund be worth after the initial $1,000 investment and after 44 years, earning 6%, compounded monthly? Wow! $271,100. Surprised! Don’t be. You’re witnessing the amazing power of compounding.

   Next, let’s assume that instead of sticking just $100 a month in the Target Retirement 2060 Fund, post-graduation, Raegan decides to increase her savings rate by $100 per month at the turn of each decade. She’ll start off with the same $6,700, post-graduation, but over the next 10 years she will invest $200 per month, then $300 per month, then $400 per month, and finally $500 per month (for the last 12 years), earning the same 6%, compounded monthly. You’re going to be surprised. Upon retirement, her Roth balance could total a whopping $725,500. And what if she had been too conservative in her yield estimate, and it turned out to average 7% instead of 6%? In the 7% case, she might end up with almost a cool million bucks ($959,000 to be more precise) in her Roth IRA that she will be able to take out TAX FREE.

    Of course, we’re speculating on long-term yields in the above cases, but nice going, Raegan, if you are able to meet these wonderful goals!


¹Target Date Funds are designed to shift to a more conservative blend of investments as the investor grows older.

²Because Raegan will have already paid taxes on her Roth IRA contributions, qualified withdrawals from the account in retirement are 100% tax-free as long as it's been open for at least five years and the account’s owner is age 59 ½ or older.  Raegan also is aware of an obvious downside to a Roth…its lack of an immediate tax benefit. Why? Earned income contributions to a Roth are after-tax.

A Tottering Stool
July 26, 2019

You’re familiar with the three-legged stool, aren’t you? It’s an unsteady device often employed to reach seldom-used items stored on the pantry’s top shelf. It’s likewise a fading metaphor used by older investors to describe the primary components of a well-rounded retirement plan. In times quickly waning, the plan consisted of an employer-sponsored pension plan (commonly called a Defined Benefit Plan¹), supplemented by personal savings and Social Security. In that largely bygone era, an approach lacking any of these primary components raised the fear of dog food consumption in one’s future.

     This week's blog will focus on the rapidly transitioning “employee pension plan” leg of the Three-Legged Stool – a financial phrase that describes the most common sources of retirement income for many individual investors. When I suggest in my blogs that investing should be simple, I’m not just discussing social security, or an employee plan you might be participating in at work. Rather, I’m focusing on the individual’s personal savings effort that, today, is having to replace those rapidly disappearing employer-sponsored Defined Benefit Plans or DBPs (commonly known as pension plans). In short, with the steady disappearance of company pension plans, the management of retirement packages is becoming YOU, the individual investor’s responsibility.

    Things are always evolving. That old three-legged stool looks increasingly different in today’s financial world. Those DBPs once offered by many employers are becoming relatively scarce. I’ve read that only about 20% of America’s Fortune 500 companies offer some variety of DBPs to new employees when, barely a generation ago, that number was closer to two-thirds. More and more companies have replaced DBPs with what are called Defined Contribution Plans² or DCPs, popular examples being 401(k) and 403(b) plans. In short, the old DBP leg is morphing into and becoming part of the personal savings leg, dropping into the individual saver’s lap a much greater responsibility for accumulating and managing an even larger portion of retirement savings.

    In today’s world, many generous employers contribute funds to their workers' retirement by matching a portion of what employees contribute to their 401(k) or 403(b) plans, within specified limits. Top limits of 3-6% are not unusual, but remember, it’s FREE MONEY. Consider this employer match, this free money, as today’s partial pension replacement – a much smaller leg of your three-legged stool with the caveat that it exists only when YOU contribute dollars to be matched.

    Next, let’s address the increasingly “iffy” Social Security retirement program leg of the stool. The financial media is filled with all sorts of projections and opinions about whether this important component of your retirement stool has a leg to stand on (poor attempt at humor). According to recent 2019 Social Security and Medicare Boards of Trustees projections, without legislative changes, the Social Security Retirement Trust Fund is projected to deplete by 2035, at which point retirees will receive only about 75% of their scheduled benefits. On a brighter note, the Disability Trust Fund will not deplete until 2052, a 20-year improvement over last year’s forecast due to continuing significant declines in disabled-worker applications and lower-than-expected disability-incidence rates.

    No, Social Security benefits will not completely disappear in the projected 2034-35 time-frame, but without political intervention, beneficiaries will face an immediate across-the-board 21% benefit cut that will grow over time to 26% by 2090. Why, you ask, would any benefits be available? Payroll taxes paid by younger workers after 2034 and trust fund interest will be enough to fund about 79% of scheduled benefits, but at an ever-declining rate. So, without a major political fix – reduced benefits, increased retirement ages for full benefits, higher earnings limits subject to tax, etc. – you should anticipate an increasingly spindly Social Security leg to your stool after 2035. To add to your somber mood, on the healthcare side of things, the 2019 report also mentioned that Medicare’s hospital insurance fund would deplete in 2026.

    So, there you have it, folks – why it’s becoming increasingly important that YOU, personally, save as much as you can during pre-retirement. That personal savings leg is fast becoming the strength of today’s three-legged stool. But a greater onus is now on you. Are you saving enough to meet your retirement goals as 2035 approaches? The legs of your personal stool absolutely must include a strong DCP leg (your personal savings), supported by two increasingly wobbly legs: Social Security and those employer (FREE MONEY) contributions to your 401(k) that may or may not be there when you need them.

    I would be remiss, of course, if I didn’t mention the increasing presence of “geezers” like myself in the post-retirement workforce. Does that mean our stools have sprouted yet another leg in today’s world? Well, yes and no. People have worked full or part-time beyond retirement age in the past. But with more baby boomers reaching retirement age lacking adequate funds to live comfortably – some, of course, just want to keep working – this older segment of the work force seems to be expanding, thus, this fourth appendage. And then, there is state and local aid going to lower income retirees, but that’s another story. In short, we do whatever is necessary to avoid those dog food dinners, or to avoid moving in with one of the kids… or a grouchy nephew (an inside story).

   So how do we beef up those personal savings? Keep reading my blogs and I’ll present some simple options.

¹A Defined Benefit Plan (DBP) is such that the benefit formula is defined and known in advance. It is a type of pension plan whereby an employer/sponsor promises a specified pension payment (or lump-sum or combination thereof) on retirement that is predetermined by formula based on an employee's earning history, tenure of service and age, rather than depending directly on individual investment returns).

²A Defined Contribution Plan (DCP) is a plan whereby the employer, employee or both make contributions on a regular basis. Benefits are credited to an employee’s account (resulting from those  contributions) plus investment earnings on the money in the account. The primary difference between a DCP and a DBP is that with a DCP, the employee is not guaranteed a certain amount of money in retirement. The employee makes his or her own investment choices and assumes all of the risks involved.

Investing Should be Simple
July 19, 2019

Without careful, long-term planning, investing is a fool’s game. And folks reading this blog are certainly not fools. Obviously, my readership – aware of the looming pitfalls out there – is looking for a better way. I take no credit for inventing a so-called “better way”. Still, I found something that works pretty well for me. But let me first remind the young wannabe investors of a few hazards in this seemingly complex investment game.

    Does it really have to be complex? There are folks out there that would like to convince you that it’s certainly too complex to navigate alone. I call ‘em Wazoos. I don’t mean for the word Wazoos to be a disparaging term. It’s just my way of lumping a faction of like-minded people together to refer to them collectively.

    From my rather biased perspective, Wazoos are the folks attempting to separate you, the perhaps untutored young investor, from a meaningful chunk of the ultimate yield on your investment dollars – their bony fingers busily clutching at a piece of YOUR pie. Wazoos come in many forms: fee-based and fee-only investment advisors, money managers and marketers, brokers and investment bankers, accountants and lawyers, etc., all aided by the necessary back-room operations that support their myriad activities.

   And investor outlays to Wazoos come in just as many forms: flat, by the hour, and annual percentage fees, brokerage commissions, transactions costs, custodial fees, annual operating expenses, legal, advertising and marketing costs, and yes, self-help books and internet blogs. Each in its own unique fashion trying to separate you, the investor, from some of your precious nickels and dimes.  

    In addition to the aforementioned Wazoos are those unavoidable market risks that await all investors, exacerbated by the inevitable erosion of Izzy the Inflation Monster who, over the long haul, has historically taken an enormous bite out of the diligent investor’s purchasing power. Makes you want to cry… or look for a simpler, cheaper way to approach long-term investing.

    Let me start that journey with a couple of slogans, the first of which is: Financial Planning: It’s Never Too Late, But Early Is Best! The second slogan involves a very basic investment approach I practice and sincerely believe: Iinvesting should be simple for the average young investor. No mincing of words here. I mean very simple – as in four easy steps.

1. By necessity, you must SAVE…particularly, once you have “earned income”.

2. Create a Roth IRA, which requires the aforementioned earned income.

3. Invest all or a portion of those savings (without fail every month) in an Index Fund, preferably a Total Stock Market Index Fund. (I emphasized "or a portion of” your savings because this simple plan is intended to initially represent only one important leg of an investor’s Three-Legged Stool. We will discuss the stool in a later blog).

4. Don’t stop saving and investing until you retire, which requires discipline and patience – things we’ve already talked about – and cost avoidance, which we will address in future blogs (no actively managed funds please and avoid those Wazoos, including Squeezy the Syphon Python, who I will fully introduce later).

    The late mutual fund industry giant, John Bogle’s approach to investing was even more pithy. Short and concise enough to be jotted on the palm of your hand:

1. Bogle advised investors to diversify by owning the entire stock market (a good example would be to own Vanguard’s Total Stock Market Index Fund, but then, Vanguard’s founder, Bogle, was biased).

2. And then to exercise boundless patience. “Don’t just do something, stand there,” he constantly reminded people.

3. And finally to invest at the lowest possible cost (in short, if possible, avoid Squeezy and the rest of those Wazoos).

     Both approaches seem almost too elemental, don’t they? Elemental, indeed, but even simple things can be difficult to achieve. In any event, having gained your attention – if only for a moment – let’s review a couple of options. If you don’t wish to read any further, take a discerning look at my four-step program above, hop aboard or not, and get on with the rest of your life.  It’ll work without constant monitoring. All you have to do is save a few bucks a month, invest those dollars in a broad market index fund, and then exercise a ton of patience. And…and…dare to be average! More about being average later.

    However, if you don’t mind reading future blogs, allow me to elaborate a bit on those four simple steps to gain a better understanding of why this long-term strategy might work for you. I’ve already discussed an important first step in the saving cycle (see my July 5, 2019 “Rainy Day Funds” blog in the Past Posts section), an important protective shield for an investor’s long-term savings plan. But first (next week), let’s discuss a long-term plan that seems to be the fundamental approach of many investors in today’s world, the [Tottering] Three-Legged Stool. To my subscribers, look for an email announcing its arrival. To those who are not subscribers, please consider subscribing!

   But before I close, how about a HYPOTHETICAL example of the potential of this simplistic approach to investing for retirement. Suppose an individual was gifted $3,000 by his/her parents (to meet the minimum investment requirement), started saving $100 per month right out of school, and then invested the $3,000 minimum and the monthly $100 (and all fund dividends and long-term gains) in Vanguard’s Total Stock Market Index Fund until age 65, compounded quarterly, assuming a yield of 6.82% per annum – the fund’s average yield since inception. This hypothetical plan would produce $416,300 before inflation and taxes, after 45 years. Double the monthly amount saved (but not the initial contribution) and the amount accumulated at age 65 becomes almost $770,000. Do I have your attention? This simple investment approach as one leg of your Three-Legged Stool might be worth a second glance. All you have to do is Dare to be Average…and save, save, save!

The Amazing Power of Compounding
July 11, 2019

I crossed paths with this fancy-pants term - Exponential Growth-Bias - while reading an article¹ by Dr. Shlomo Benartzi, a professor at UCLA’s Anderson School of Management. The good doctor explained this type of bias as “the tendency of people to neglect the effects of compound interest in their thinking”. So, why do I start bloviating about the potential impact of compound versus simple interest (I call it The Amazing Power of Compounding) in a blog about saving and investing? My reasoning is that a basic understanding of compound interest is at the very core of developing an optimal long-term saving and investment program…and it’s the very reason why my target audiences are our younger generations. Simply put, they have more time to benefit from compounding.

    To not appreciate the impact of compounding on a saver’s long-term investment program can have lifelong implications. I will mention compounding time and again in future blogs, but I wanted to highlight it early in my blog’s life, with examples, hoping my youthful audiences will come to appreciate its important role in reaching long-term goals.

   Later examples will come but allow me to use a Dr. Benartzi example because it gets right to the point. He asked the simple question, “How much money will you have in your retirement account should you invest $400 a month at 10% for 40 years, compounded monthly?”  The correct answer – which adds the interest earned each month to the principal sum, and then calculates the following month’s interest on that amount – is approximately $2,530,000 using Bankrate’s simple savings calculator.

    Or more telling, what would be the end result of investing a single dollar at age 20, compounded monthly at 10% until age 65...just one dollar, mind you. The answer: $88.35. If you wait until you’re 40 to invest that single dollar, you would end up with just $12.06 at age 65.  

    So what’s the big deal? The big deal is that most folks suffer from Exponential-Growth Bias mentioned above… the tendency to neglect or not truly understand the effects of compound interest. Following Dr. Benartzi’s reasoning, they will usually do a quick simple interest mental calculation of $400 x 12 months x 40 years x 1.1, the sum of which is $211,200. In short, people tend to overlook the potential impact of compound interest on long-term investing – much to their detriment.

    And Exponential-Growth Bias cuts both ways. Those who suffer from this bias are often guilty of taking on too much debt because they  underestimate the true cost of borrowing. Be assured that the Wazoos who loan us money on a long-term basis (mortgage companies, auto companies, etc.) are well-schooled on the benefits of compounding. Who among us hasn’t suffered the shock of the true cost of a home, factoring in 30 years of mortgage payments. Ignoring homeowners’ insurance and property taxes for a moment (which are usually included in a monthly mortgage payment), the ultimate out-of-pocket  cost of a $300,000 home financed for 30 years at a 4.5% rate of interest  comes to $497,800 (assuming a 20% down-payment). At 5.5%, the cost of that same home almost doubles to $550,600. Whew!

    To guard against both sharp edges of the Exponential-Growth Bias blade – the tendency for all of us to save less and borrow more during a lifetime – a clear understanding of The Amazing Power of Compounding is in order. A power that can work both for and against us. Perhaps this brief enlightenment won’t totally solve the problem (you can lead a horse to water… blah… blah… blah), but exposure to the math just might make us consider the true consequences of certain long-term money decisions – of the high cost (and/or rewards) of venturing down such paths. To paraphrase the good doctor,  “there’s magic in investing our money and leaving it alone… and of paying down debt as quickly as possible.” For more information on this topic, go to the Q&A page of this website.

    ¹Wealth Management Section, Don’t Save enough? Perhaps You Have ‘Exponential-Growth Bias’, Wall Street Journal, June 17, 2019.

Rainy Day Funds
July 5, 2019

Where to start? You’re just out of school. You have a new job. You finally have a steady source of income. And you feel like it’s time to put some financial order in your life. You’ve probably read or heard comments in the news media that most individuals/families would be hard pressed to meet an unanticipated $500 expense. I found that hard to believe until a couple of years ago when a major local disaster – the August 2017 Hurricane Harvey flood – damaged over 200,000 homes in the Greater Houston area. This devastating event left thousands of gainfully employed people in a major financial pickle. It compelled me to write an article that my daughter published in her informative website (http://youmeandthetree.com/). She posted it under TIPS FROM POPS and titled it “Harvey, Irma and the Importance of Rainy Day Funds”.

    A rainy day fund, huh? When you’re flirting with financial insecurity – living from paycheck to paycheck – the first order of business you should tackle is to accumulate 3 to 6 months of liquidity to meet unexpected expenses. Think about it. Most young people on the front-end of their first good job with generous benefits often can’t even meet medical plan or auto insurance deductibles much less the cost of unexpected emergencies. So, they should start building a liquid rainy day fund… money that’s deposited in an easily retrievable but separate bank account.

    In the case of the Harvey flood, I wasn’t referring to the Texas Legislature’s multi-billion-dollar “Economic Stabilization Fund”, a type of governmental rainy day fund used for disaster relief. I was speaking of the tens of thousands of individual Texas Gulf Coast citizens who, tragically, found themselves with flooded homes, soaked furniture, ruined automobiles, moldy clothing, and in some cases, an interrupted paycheck. Seventy-five percent of these folks were located outside the 100-year flood plain, not covered by flood insurance, and without a personal rainy day or emergency fund to help restore their lives to normal.

    According to a FINRA Investor Education Foundation Study, 56% of people nationally don’t have an emergency fund large enough to cover 3 months, much less 6 months of unexpected expenses – outlays such as major auto or home repairs, job loss, medical emergencies, unplanned travel expenses and… ahem… flooded homes. Sixty-four percent of Americans don't have enough cash on hand to handle a $1,000 emergency expense, let alone an uninsured flooded home, according to a survey by the National Foundation for Credit Counseling. Twenty-five percent of Americans don’t have a rainy day fund at all. Many of these folks do, in fact, live from paycheck to paycheck, often by necessity, choosing to run the risk that no major financial disaster will uproot their lives. It’s a good bet that one week before Harvey struck, most Houston and Harris County, Texas, citizens barely gave a tropical depression in the Southern Gulf a second thought… or if they did, bet that it would not veer north with uncommon fury.

      So, what happens when individuals or families without rainy day funds suffer a financial setback. They borrow from family or friends. They neglect to pay other bills. They sell or pawn other assets. They get a cash advance from a credit card company. They mostly do those things that simply exacerbate their financial woes. This is why I titled this blog, A Financial Firewall. In addition to helping meet those unexpected expenses, a rainy day fund helps avoid disruptions in meeting the goals of a long-term financial plan. More on that in later blogs.

      So, how does one begin the process of building an emergency fund? First, don’t set initial emergency fund goals so high that you soon deem them unrealistic or unattainable. One hundred or one thousand dollars is better than nothing, and when you hit that mark, strive for two hundred or two thousand dollars… then three hundred or three thousand, etc. To protect yourself against the possibility of a major emergency, develop a working relationship with your local banker and establish a meaningful line of credit. Money that could be borrowed in case of a financial emergency. And in that instance, use your smaller rainy day fund to supplement the line of credit.

    Where do these emergency funds come from? As sources of funds, reduce or eliminate spending on nonessential goods and services while building your nest egg. Use spare change – dimes, quarters and dollars – or an unexpected salary increase, a tax refund, or a few restaurant meals foregone. You might even have that bank mentioned above automatically shift a small amount of money ($25-$100) from your checking to your emergency account each month. After a month or two of shifting, you might not even notice the difference, and it adds up quickly!

    But in getting started, ensure that basic day-to-day needs are met to avoid discouragement during the accumulation process. And be wise, keep your emergency funds in a separate account; one less accessible than your regular checking or savings accounts. And DO NOT carry a debit card tied to that account. Make it a bit inconvenient to access these funds. In short, make the account accessible, but not too accessible. Force yourself to consider your actions before making a withdrawal. Accept the fact that all of us lack a bit of monetary self-discipline from time to time.

    In short, a rainy day or emergency fund is a relatively accessible stash of cash for use only in case of emergency. Don’t use it to buy an automobile or computer. Don’t buy a new piece of furniture or remodel your kitchen with it, unless, of course, you had a rainy day fund and lived in the City of Houston and Harris County, Texas, back in 2017. By the way, Houston, a bustling metropolitan area well-stocked with numerous Fortune 500 companies, is also a population of folks with big hearts in times of great stress. In addition to friends and neighbors, hundreds upon hundreds of companies, large and small, came to the aid of Harvey victims – supplying employees with temporary housing, food supplies, interest free loans, grants and volunteer cleanup crews in addition to counseling and employee time off to take care of family needs.  These were voluntary acts, and not all companies participated, but let us NOT forget about those many rainy day employers, friends and neighbors who did!

    To drive this “rainy day fund” point home, in December 2018 The Federal Government halted the function of many of its agencies due to a budget impasse. Some 800,000 federal workers and service providers with very secure jobs missed a paycheck or two. As is typical of government shut-downs, those workers later received the missed paychecks, accrued sick and vacation time – and their pensions were calculated as if they had been on the job during the shutdown. Still, according to news reports, many of those government workers quickly began to experience all kinds of financial chaos. In short, despite holding very secure positions with the federal government, many of them could not handle this short-term financial disruption in their lives.

  Simply put, a rainy day fund is your first step toward long-term financial security. And it also serves as a firewall protecting your long-term plan from short-term financial chaos.

Millennials call it FIRE (Financial Independence, Retire Early)
June 29, 2019

The Wynn-Fowler, Inc. experience was my final effort in the stress-filled game of energy marketing. I next decided to try my hand at what more and more  of today’s Millennials (Generation Y) propose to do with their careers – retire from the eight-to-five merry-go-round by age forty and become masters of their own destiny. They call it FIRE (Financial Independence, Retire Early). In so doing, I pursued several interests. I continued to serve on the Board of Governors of the OSU Foundation; managed all aspects of my immediate family’s personal assets, including two partnerships; co-founded a real estate company; spent years volunteering in water conservation education during which time I co-founded and served as Chief Financial Officer of  Water Lily Press, Inc. and SaveWaterTexas.com; wrote several fictional novels, a financial primer for Generation Xers, numerous water industry white papers, and several biographies of luminary figures in the energy, water, and southwestern art fields, a couple of  “Dime Novel” series of historical Texas notables, and wrote and published a children’s book, illustrated by the celebrated artist, M. S. Franco. Together, this amazing artist and I continue to donate proceeds from the book for fundraising purposes.

Early in my FIRE-like period, I accepted as factual Woody Allen’s gag that “the definition of a broker is someone who invests your money until it is all gone”.  I also adopted my own PDQ Principles of investing (patience…diversification… quality). At their core, these principles orbit around Vanguard icon, John Bogle’s industry-impacting Index Funds (Bogle died January 16, 2019). This simple approach to investing changed my life – made it more financially productive and less stressful – liberating time that I could commit to other interests. Life has been good to me. Good enough such that I developed my own personal motto: For those more fortunate, help those less blessed.

By the way, even though patience is one of my PDQ principles, and although I lean toward a buy-and-hold strategy, we, as investors, must be ever attentive. In short, don’t set-it-and-forget-it because as Bob Dylan would tell us, “The Times They Are A’Changin’.

In closing, I extend my everlasting appreciation to the late John Bogle whose inventiveness exposed retail index funds to millions of small investors like myself. As a result, those years of higher returns from investing in low-cost index funds provided me with the FIRE to leave the corporate world behind and do my own thing.

That said, it’s time to address the important business of saving and investing, never forgetting these watchwords: Financial Planning: It’s Never Too Late, But Early Is Best!

Other Life Experiences
June 26, 2019

Life brings countless learning experiences, but none more impactful than those imposed by my parents before I reached my teenage years. In brief, my later experiences included working one summer on a sister’s farm in exchange for room, board and a heifer calf. Over time, that single little heifer multiplied into a small herd that helped pay for college.

I paid for 100% of my college expenses working odd jobs during summer and semester breaks and for Oklahoma State University (OSU) after class. Such an accomplishment can still be attained, but it requires non-monetary assistance. Several of those summer jobs were arranged by my brother. And my future wife, also an OSU student, played an important role in this effort. She worked as secretary for the Dean of Men who awarded Dean’s Honor Roll certificates each semester. Since I didn’t have time or money to waste, I made his list every semester. Through a Residence Council, the Dean rewarded my scholastic effort by recommending that I be appointed the first president of a new dormitory, Parker Hall, and hired me as a student assistant in the facility. The job came with important perks: a private room and telephone, twenty meals per week in the cafeteria, and a small monthly remuneration. That experience taught me to always be cordial to secretaries (and university Deans).

Along the way, I received a single $500 scholarship. Those funds helped restore my somewhat depleted savings account. Life was good thanks to the Dean and to my future wife.

Graduating with a Bachelor of Science degree in Accounting, I briefly worked in Humble’s (now ExxonMobil) Tax Department before serving two years as a U.S. Army Finance officer in Turkey.

After military service, I returned to OSU where, with the help of a hardworking wife, I earned an MBA degree. While there, I managed an apartment complex for OSU’s Housing Department. The perks of that job included a two-bedroom apartment (we needed the space, Kim had arrived), a family meal ticket good at all university cafeterias, deeply discounted tuition, a free medical plan, and a student activities pass to all campus events. A small G.I. Bill stipend also came in handy.  

Upon completion of my MBA studies, I accepted a position with a mortgage company’s commercial loan department. I left the mortgage company – a good learning experience, but not my cup of tea – to join Conoco’s Management Training Program. My last position after seven years with this good company was Director-Supply & Distribution in their Natural Gas Department.

I left Conoco to join a startup firm as Executive Vice-President and part owner of Gulf States Oil & Refining Company. After selling my interest in Gulf State, I co-founded and served as President of Wynn-Fowler, Inc., an energy products marketing company. During this period, I served on the Board of Governors of the OSU Foundation for several years. While on the Board, my wife and I funded several President’s Distinguished Scholarships (PDS). These prestigious scholarships are designed to attract top high school graduates to OSU, and because they are perpetual in nature, still help to fund the education of top OSU students.

Be patient with me. I have just one more history lesson before getting to the point of what this blog is all about.

Cotton Pickin’ and Eggs
June 12, 2019

I was the last of eight kids who grew up on a cotton farm in Western Oklahoma. My parents struggled to rear their offspring during some tough times: the 1930s Depression, its evil twin, the Dust Bowl, WWII and an epic 1950s drought. Both out of necessity and by design, they used these difficult circumstances to teach us the value of time and money – in short, how to be fiscally conservative.  

In those “good ole days” money was a scarce commodity. Most farmers didn’t hire field hands. They put their kids to work. When we enrolled in primary school, our father also introduced us to the cotton patch. It wasn’t slave labor or child abuse. He paid us a wage commiserate with our ability to do field work, but there was a catch. Each autumn, our mother took the younger kids to JCPenney to buy school clothes. Fifty percent of the clothing tab – the catch – was deducted from our cotton patch earnings. Anything left over, we could spend as we wished. I can’t speak for my siblings, but that 50% obligation focused my mind on how much I spent on school attire. It also taught me to carefully monitor other spending habits at a young age.

I also had other duties when not toiling in the cotton fields. These chores included milking a couple of cows, filling hay cribs for the rest of the herd, slopping hogs, pumping fresh water for my mother’s kitchen, and tending to the chickens– including securing their roost each evening to ward off night-prowling varmints. My reward for these tasks was the week’s accumulation of “surplus” eggs – a commodity that I exchanged for cash at the local produce store.

All eggs not required by my mother for the family’s breakfast or for my sisters’ desserts, were mine to keep. Once I stowed an egg in my crate, no one dared touch it but me. This egg business also taught me the rudiments of negotiation – with the produce store egg buyer and with my pesky sisters regarding their egg consumption. They deliberately tormented me about my hoarding tendencies – ordering extra eggs for breakfast or inventing fictitious recipes that required prodigious quantities of egg whites or yolks. These loving but mischievous sisters seldom followed through with their schemes, but only after some serious negotiation with their little brother. I usually ended the week with a tidy number of eggs.

Those produce store visits exposed me to more than swapping eggs for cash. My first duty was to check the store’s chalkboard for that day’s egg quotes, frequently a stomach-churning experience. I quickly learned that selling a commodity could be a risky endeavor.  In hindsight, my common-sense father exposed me to these elementary business skills for good reason. To this day, I  appreciate his simple but effective lessons in personal finance – and my mother’s insistence that I open a savings account at the local bank into which I made a weekly deposit before a single penny of egg money could be spent elsewhere.

Trading my time for money and having to pay for essentials (clothing) before spending a penny for pleasure introduced financial habits that would stick with me throughout life. Equally important was the discipline learned by opening and depositing money into that tiny savings account every week – money untouched and earning interest until I left home for college years later.

Stay tuned. I’ll get to what this blog is all about very soon.