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Insurance companies make money not from the unfortunate, but the fortunate—those who pay their premiums but make no claims.

Deadly Serious

THE MUSICIAN PRINCE died in 2016 at age 57, leaving behind a legacy of musical genius. Unfortunately, he also left behind an ongoing legal and financial mess. The issue: For reasons no one understands, Prince neglected to prepare even the most basic estate plan, leaving potential heirs squabbling over his fortune.
Under the latest tax law, passed late last year, only those with more than $11.2 million in assets ($22.4 million for a married couple) are subject to federal estate taxes.

Read more »

Simple Isn’t Easy

ALLAN ROTH likes to describe himself as argumentative—and, on that score, it’s hard to argue with him. But it’s also hard to argue with the points he makes, because he has this nasty habit of being right.
Roth is the author of How a Second Grader Beats Wall Street, a financial planner who charges by the hour, and a contributor of financial articles to AARP.org, Financial-Planning.com, NextAvenue.org and other sites. I caught up with him last month at the Bogleheads’ conference in Philadelphia.

Read more »

Pillow Talk

WHAT’S IT LIKE to be married to a personal finance expert? Trust me, it isn’t easy—especially if you’re a fiercely independent but less-than-perfect manager of your own money.
Before I met Jonathan, I was a divorcee who hadn’t shared her financial life with anybody for a few years, but who had been bumbling along just fine on her own. When we started dating, we hardly ever spoke about money. The most he knew about my spending habits was that I was very good at justifying purchases,

Read more »

Taking Their Money

“UNCLE” PHAN, my father’s closest friend and my godfather, committed suicide a few years ago. I regret not seeing him often enough when he was alive and not letting him know how much I appreciated his humor and generosity.
I also regret not knowing his financial and emotional situation.
Uncle Phan retired as a surgeon 20 years ago and took a lump sum distribution instead of a lifetime monthly pension. It should have been enough to last the rest of his life,

Read more »

Family Inc.

WHAT’S THE MOST important financial decision you’ll make in your life? Is it when to take Social Security? Choosing the right asset allocation for your investment portfolio? How about the decision to rent or buy a place to live?
I believe that, for many people, it’s who they choose to be their significant other. Together, you’ll decide how you spend your money and how much to set aside for retirement. There will be endless decisions dealing with money—and some will have a huge impact on your financial wellbeing.

Read more »

Money Guide

Income Annuities

SOCIAL SECURITY, with its guaranteed stream of inflation-indexed income, is arguably the best income annuity available. This is why you should give serious thought to delaying Social Security, so you get the largest possible check. Even if you delay benefits, you may want more lifetime income. That’s where income annuities come in. Annuities have a reputation for being costly, complicated products pushed by aggressive salespeople. A January 2015 survey by TIAA found that just 28% of Americans had a favorable impression of annuities. But not all annuities are a bad investment. There are four types you might consider: Immediate fixed annuities. These can provide a check every month for life, though—unlike Social Security—that check usually doesn’t increase with inflation. Charitable gift annuities. These are similar to immediate fixed annuities, except you buy from your favorite charity, not an insurance company. The downside: Charitable gift annuities typically pay less income. The upside: If you die early in retirement, your favorite charity stands to benefit, rather than an insurance company. Charitable gift annuities, along with charitable remainder trusts, are discussed in the chapter devoted to estate planning. Longevity insurance. This provides lifetime income starting at a future date, thus addressing the financial risk of living a surprisingly long time. Variable annuities that generate income. These are complicated products that offer the chance to generate lifetime income, while still investing for long-run growth. Some allow you to add a so-called living benefits rider, while others can be converted into immediate variable annuities. Our Humble Opinion: Retirees are often reluctant to buy income annuities, just as they’re reluctant to delay Social Security. We think this is a mistake. Delaying Social Security and buying income annuities can be the key to a more comfortable, less financially stressful retirement. Both strategies make particular sense for those looking to squeeze maximum income out of their savings. Intrigued by income annuities? We'd suggest focusing on longevity insurance and plain-vanilla immediate fixed annuities. Next: Pooling Risk Previous: Pension vs. Lump Sum Payment Blog: One Cheer
Read more »

Numbers

SIX OUT OF 10 people say they’re better off financially than they were a year ago. Only five out of 10 said that in 2017, according to a WalletHub survey.

Newsletter

Fanning the Flames

WHAT COULD POSSIBLY be wrong with saving like crazy, so you can retire early? That’s the notion behind the Financial Independence/Retire Early, or FIRE, movement. Yet lately, I’ve read a lot of carping about FIRE, both in articles and in the emails I receive.
Just last week, those complaints got yet another airing in The Wall Street Journal. Earlier, Suze Orman weighed in, arguing you need at least $5 million to retire early.

Read More »

Archive

Sell or Sweat?

DON’T GIVE INVESTMENT advice to clients. That’s something I’ve repeatedly learned as a tax lawyer. Still, when financial markets gyrate, many clients want advice about taxes, especially the seemingly simple rules for capital gains—and I have a longstanding fondness for eating three times a day. Let’s start with the basics. Take an individual who sells an investment that she has owned for more than 12 months. Any increase in its value from its cost basis is taxed at her long-term capital gains rate—15% for most individuals, but as high as 23.8% for those who are in the top ordinary income-tax bracket of 39.6% and subject to the 3.8% Medicare surtax on investment income. It can get worse. She surrenders more to the IRS when her profit is from the sale of an asset held for 12 months or less. Her short-term capital gain is taxed at higher ordinary income-tax rates—the same rates that apply to income sources like salaries and pensions. The dilemma: Should savvy investors opt to realize short-term gains, so as to nail down profits, albeit causing them to be nicked for taxes at the same rates as ordinary income? Or is the wiser strategy to stand pat until those profits become long-term, meanwhile hazarding declining prices that could more than offset the lower taxes? Consider an example. Let’s say Norma Bates’s regular income-tax bracket is 25%. (In 2017, that rate applies to taxable income between $37,950 and $91,900 for singles and between $75,900 and $153,100 for joint filers.) Norma has a sizable unrealized gain on shares of Beefsteak Uranium, a volatile stock she has owned for fewer than 12 months. She’s considering selling her BU shares for fear of plummeting prices, perhaps caused by terrorist attacks or world instability (cue countries like North Korea, Iran and Russia). Norma’s worst fear: photos of BU’s top execs being booked on charges of securities fraud and larceny, a result of cooking the books, spending company funds on personal indulgences or some other kind of corporate chicanery. Her first option: Unload the shares now and secure the short-term gain, but lose 25% of her profit to the IRS. Depending on where she lives, she may also owe state and even city taxes. Her other option: Hold off on a sale until the gain becomes long-term, and forfeit no more than 15% of it to the IRS, plus local levies. How much of a drop can Norma endure while waiting until she qualifies for that lower rate and still be no worse off after taxes? For the answer, she can use this three-step calculation:
  • Figure her after-tax short-term profit from her BU shares.
  • Divide this amount by her after-tax profit on the same amount of long-term gain.
  • Multiply the short-term gain by the resulting decimal.
To see how the math work, let’s plug in some numbers. Suppose Norma’s paper profit is $10,000. Her combined federal and state bracket is 30% for short-term gains. For long-term gains, it’s 20%.
  • A $10,000 gain taxed at 30% entitles the tax collectors to $3,000, leaving Norma with $7,000.
  • The same $10,000 taxed at 20% leaves her with $8,000. Divide $7,000 by $8,000 and you get 0.875.
  • Multiply $10,000 by 0.875 and the result is $8,750. A smaller long-term profit of $8,750 taxed at 20% leaves Norma with $7,000—the same profit she would have received were she to sell for a $10,000 gain and be taxed at 30%.
When does a decision to sweat out the 12-month holding period leave Norma worse off after taxes? Not until her paper profit drops from its present $10,000 to below $8,750—that is, by more than $1,250. Is it worth waiting? Clients have to decide that one for themselves. Julian Block writes and practices law in Larchmont, NY, and was formerly with the IRS as a special agent (criminal investigator). His previous blog was Hitting Home. This article is excerpted from Julian Block’s Year-Round Tax Savings, available at JulianBlockTaxExpert.com. Follow Julian on Twitter @BlockJulian.
Read more »

Act

GIVE AWAY MONEY NOW? You might be considering a large financial gift to your favorite charity or to your children. Charitable contributions aren’t limited, though their tax-deductibility can be. Meanwhile, with your kids, you might take advantage of the $15,000 annual gift-tax exclusion. But before you do, check you have plenty for your own retirement.

Truths

NO. 71: IF YOU’RE FIVE YEARS from spending your investment dollars, look to get that money out of stocks, because stocks have lost money over some five-year stretches. Indeed, to invest in stocks, you probably need at least 10 years—five years to make money and a five-year window to ease out of the market, preferably selling when stocks are near all-time highs.

Think

SUNK COST FALLACY. Suppose you’re paying hefty annual premiums to buy cash value life insurance. The money is largely gone—it’s a “sunk cost”—and yet you might hang on to the policy, hoping it’ll eventually pay off, even if you believe the dollars would be better invested elsewhere. Such irrational persistence can also occur if we’ve sunk significant time and effort into a project.

About Jonathan

Jonathan Clements

HumbleDollar is edited by Jonathan Clements, author of From Here to Financial Happiness.

Home Call to Action

Latest Blogs

Deadly Serious

THE MUSICIAN PRINCE died in 2016 at age 57, leaving behind a legacy of musical genius. Unfortunately, he also left behind an ongoing legal and financial mess. The issue: For reasons no one understands, Prince neglected to prepare even the most basic estate plan, leaving potential heirs squabbling over his fortune.
Under the latest tax law, passed late last year, only those with more than $11.2 million in assets ($22.4 million for a married couple) are subject to federal estate taxes.

Read more »

Simple Isn’t Easy

ALLAN ROTH likes to describe himself as argumentative—and, on that score, it’s hard to argue with him. But it’s also hard to argue with the points he makes, because he has this nasty habit of being right.
Roth is the author of How a Second Grader Beats Wall Street, a financial planner who charges by the hour, and a contributor of financial articles to AARP.org, Financial-Planning.com, NextAvenue.org and other sites. I caught up with him last month at the Bogleheads’ conference in Philadelphia.

Read more »

Pillow Talk

WHAT’S IT LIKE to be married to a personal finance expert? Trust me, it isn’t easy—especially if you’re a fiercely independent but less-than-perfect manager of your own money.
Before I met Jonathan, I was a divorcee who hadn’t shared her financial life with anybody for a few years, but who had been bumbling along just fine on her own. When we started dating, we hardly ever spoke about money. The most he knew about my spending habits was that I was very good at justifying purchases,

Read more »

Taking Their Money

“UNCLE” PHAN, my father’s closest friend and my godfather, committed suicide a few years ago. I regret not seeing him often enough when he was alive and not letting him know how much I appreciated his humor and generosity.
I also regret not knowing his financial and emotional situation.
Uncle Phan retired as a surgeon 20 years ago and took a lump sum distribution instead of a lifetime monthly pension. It should have been enough to last the rest of his life,

Read more »

Family Inc.

WHAT’S THE MOST important financial decision you’ll make in your life? Is it when to take Social Security? Choosing the right asset allocation for your investment portfolio? How about the decision to rent or buy a place to live?
I believe that, for many people, it’s who they choose to be their significant other. Together, you’ll decide how you spend your money and how much to set aside for retirement. There will be endless decisions dealing with money—and some will have a huge impact on your financial wellbeing.

Read more »

Numbers

SIX OUT OF 10 people say they’re better off financially than they were a year ago. Only five out of 10 said that in 2017, according to a WalletHub survey.

Truths

NO. 71: IF YOU’RE FIVE YEARS from spending your investment dollars, look to get that money out of stocks, because stocks have lost money over some five-year stretches. Indeed, to invest in stocks, you probably need at least 10 years—five years to make money and a five-year window to ease out of the market, preferably selling when stocks are near all-time highs.

Act

GIVE AWAY MONEY NOW? You might be considering a large financial gift to your favorite charity or to your children. Charitable contributions aren’t limited, though their tax-deductibility can be. Meanwhile, with your kids, you might take advantage of the $15,000 annual gift-tax exclusion. But before you do, check you have plenty for your own retirement.

Think

SUNK COST FALLACY. Suppose you’re paying hefty annual premiums to buy cash value life insurance. The money is largely gone—it’s a “sunk cost”—and yet you might hang on to the policy, hoping it’ll eventually pay off, even if you believe the dollars would be better invested elsewhere. Such irrational persistence can also occur if we’ve sunk significant time and effort into a project.

Home Call to Action

Free Newsletter

Fanning the Flames

WHAT COULD POSSIBLY be wrong with saving like crazy, so you can retire early? That’s the notion behind the Financial Independence/Retire Early, or FIRE, movement. Yet lately, I’ve read a lot of carping about FIRE, both in articles and in the emails I receive.
Just last week, those complaints got yet another airing in The Wall Street Journal. Earlier, Suze Orman weighed in, arguing you need at least $5 million to retire early.

Read More »

Money Guide

Start Here

Income Annuities

SOCIAL SECURITY, with its guaranteed stream of inflation-indexed income, is arguably the best income annuity available. This is why you should give serious thought to delaying Social Security, so you get the largest possible check. Even if you delay benefits, you may want more lifetime income. That’s where income annuities come in. Annuities have a reputation for being costly, complicated products pushed by aggressive salespeople. A January 2015 survey by TIAA found that just 28% of Americans had a favorable impression of annuities. But not all annuities are a bad investment. There are four types you might consider: Immediate fixed annuities. These can provide a check every month for life, though—unlike Social Security—that check usually doesn’t increase with inflation. Charitable gift annuities. These are similar to immediate fixed annuities, except you buy from your favorite charity, not an insurance company. The downside: Charitable gift annuities typically pay less income. The upside: If you die early in retirement, your favorite charity stands to benefit, rather than an insurance company. Charitable gift annuities, along with charitable remainder trusts, are discussed in the chapter devoted to estate planning. Longevity insurance. This provides lifetime income starting at a future date, thus addressing the financial risk of living a surprisingly long time. Variable annuities that generate income. These are complicated products that offer the chance to generate lifetime income, while still investing for long-run growth. Some allow you to add a so-called living benefits rider, while others can be converted into immediate variable annuities. Our Humble Opinion: Retirees are often reluctant to buy income annuities, just as they’re reluctant to delay Social Security. We think this is a mistake. Delaying Social Security and buying income annuities can be the key to a more comfortable, less financially stressful retirement. Both strategies make particular sense for those looking to squeeze maximum income out of their savings. Intrigued by income annuities? We'd suggest focusing on longevity insurance and plain-vanilla immediate fixed annuities. Next: Pooling Risk Previous: Pension vs. Lump Sum Payment Blog: One Cheer
Read more »

Archive

Sell or Sweat?

DON’T GIVE INVESTMENT advice to clients. That’s something I’ve repeatedly learned as a tax lawyer. Still, when financial markets gyrate, many clients want advice about taxes, especially the seemingly simple rules for capital gains—and I have a longstanding fondness for eating three times a day. Let’s start with the basics. Take an individual who sells an investment that she has owned for more than 12 months. Any increase in its value from its cost basis is taxed at her long-term capital gains rate—15% for most individuals, but as high as 23.8% for those who are in the top ordinary income-tax bracket of 39.6% and subject to the 3.8% Medicare surtax on investment income. It can get worse. She surrenders more to the IRS when her profit is from the sale of an asset held for 12 months or less. Her short-term capital gain is taxed at higher ordinary income-tax rates—the same rates that apply to income sources like salaries and pensions. The dilemma: Should savvy investors opt to realize short-term gains, so as to nail down profits, albeit causing them to be nicked for taxes at the same rates as ordinary income? Or is the wiser strategy to stand pat until those profits become long-term, meanwhile hazarding declining prices that could more than offset the lower taxes? Consider an example. Let’s say Norma Bates’s regular income-tax bracket is 25%. (In 2017, that rate applies to taxable income between $37,950 and $91,900 for singles and between $75,900 and $153,100 for joint filers.) Norma has a sizable unrealized gain on shares of Beefsteak Uranium, a volatile stock she has owned for fewer than 12 months. She’s considering selling her BU shares for fear of plummeting prices, perhaps caused by terrorist attacks or world instability (cue countries like North Korea, Iran and Russia). Norma’s worst fear: photos of BU’s top execs being booked on charges of securities fraud and larceny, a result of cooking the books, spending company funds on personal indulgences or some other kind of corporate chicanery. Her first option: Unload the shares now and secure the short-term gain, but lose 25% of her profit to the IRS. Depending on where she lives, she may also owe state and even city taxes. Her other option: Hold off on a sale until the gain becomes long-term, and forfeit no more than 15% of it to the IRS, plus local levies. How much of a drop can Norma endure while waiting until she qualifies for that lower rate and still be no worse off after taxes? For the answer, she can use this three-step calculation:
  • Figure her after-tax short-term profit from her BU shares.
  • Divide this amount by her after-tax profit on the same amount of long-term gain.
  • Multiply the short-term gain by the resulting decimal.
To see how the math work, let’s plug in some numbers. Suppose Norma’s paper profit is $10,000. Her combined federal and state bracket is 30% for short-term gains. For long-term gains, it’s 20%.
  • A $10,000 gain taxed at 30% entitles the tax collectors to $3,000, leaving Norma with $7,000.
  • The same $10,000 taxed at 20% leaves her with $8,000. Divide $7,000 by $8,000 and you get 0.875.
  • Multiply $10,000 by 0.875 and the result is $8,750. A smaller long-term profit of $8,750 taxed at 20% leaves Norma with $7,000—the same profit she would have received were she to sell for a $10,000 gain and be taxed at 30%.
When does a decision to sweat out the 12-month holding period leave Norma worse off after taxes? Not until her paper profit drops from its present $10,000 to below $8,750—that is, by more than $1,250. Is it worth waiting? Clients have to decide that one for themselves. Julian Block writes and practices law in Larchmont, NY, and was formerly with the IRS as a special agent (criminal investigator). His previous blog was Hitting Home. This article is excerpted from Julian Block’s Year-Round Tax Savings, available at JulianBlockTaxExpert.com. Follow Julian on Twitter @BlockJulian.
Read more »
Jonathan Clements

About Jonathan

HumbleDollar is edited by Jonathan Clements, author of From Here to Financial Happiness.